In a Senate Banking Committee hearing yesterday addressing predatory lending and the effect of increasing foreclosures, Senator Christopher Dodd (D-CT) called for action to address what he characterized as "a grave threat from predatory, abusive, and irresponsible lending practices undertaken by too many subprime lenders." "Today, there are too many incentives in the subprime market to make loans that put borrowers at too great a risk of failure," Dodd said, pointing to the fact that more than half of all subprime loans go stated-income rather than full or partial doc. Dodd seemed to place as much of the blame at the feet of originating brokers as with the companies that funded questionable loans. "According to a survey of over 2,000 mortgage brokers, 43 percent of brokers who make these loans do so because they know that their borrowers don't have the income to qualify for the loan," he said in his remarks. "Why do they make these loans? Because they are paid more to do so."
Dodd also took issue with broker upsells, saying the practice hurts consumers. "[Brokers] put borrowers in loans with higher interest rates than they could otherwise qualify for, because the brokers make greater commissions, called yield spread premiums, by doing so," said Dodd. "YSPs are a perfectly legitimate tool to provide borrowers with no closing cost loans. But HUD has told us that half of the YSPs paid, about $7.5 billion, do not go to closing costs, but go simply to increase broker profits." "I believe [subprime] borrowers deserve every bit as much protection as the homeowners who take out interest-only and option ARM loans, and I want to urge the regulators to move expeditiously to provide the same protections to these particularly vulnerable borrowers." Many brokers have recently begun to discuss the potential ramifications of a subprime meltdown, with industry sources telling Housing Wire that a growing number of brokers are concerned that the buybacks recently hitting large mortgage shops across the U.S. -- with New Century and HSBC being the latest to be bitten by bad loans -- could end up on their doorsteps. Most brokerage agreements contain buyback clauses similar to the agreements mortgage bankers have with Wall Street on securitization deals, and although lenders are loathe to enforce them, increasing losses in the subprime credit sector may lead some firms to push losses down the value chain. "Economic and personal factors do not fully explain the precipitous rise in defaults and foreclosures," said Dodd. "It is time for the Congress, the Administration, and the lending industry to face up to the fact that predatory and irresponsible lending practices are creating a crisis for millions of American homeowners at a time when general economic trends are good."