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Current Financial Meltdown Gives Calls For Regulation Credit

Home News Tribune / — Saturday, October 11, 2008


A man walks into a bar, and this is no joke.

Phyllis Salowe-Kaye, the executive director of New Jersey Citizen Action, tells the story of a man who obtained a mortgage and all was well until the night be went for a drink and began talking to the woman sitting next to him at the bar.

Sadly she did not whisper sweet nothings into his ear, instead she said she was a mortgage broker and whatever deal he got she could do better. She sold him an "interest only" loan that lowered his monthly payments.

He soon discovered that while he was paying only the interest, the balance was going up every month. When he tried to void the deal he learned that he signed an agreement obligating him to pay a $12,000 pre-payment penalty.

Stories like this, multiplied thousands of times, led to subprime loan crisis that has resulted in the largest global economic upheaval since the Great Depression. A prime suspect in all this is the Community Reinvestment Act, a program developed by Congress in 1977 to provide home loans to families and single people who lives in neighborhoods avoided by banks.

As a result the CRA is being blamed, according to the NJCA, "For all the toxic paper that is now poisoning the entire global financial system. This is simply not true. Unregulated, unchecked predatory lending is the problem, not CRA."

In the late 1990s regulations governing the CRA program were eased, allowing predatory lenders to thrive. That woman at the bar was an unregulated and unchecked lender.

Salowe-Kaye knows of one borrower who was able to receive a mortgage of $450,000 on a salary of $19,000, without a serious credit check.

The lender was not concerned about the ability to pay, so long as he got his up-front fee. These loans that were eventually bundled and obtained by the financial wizards at places like the late Lehman Brothers and departed Bear Stearns, whose reason to be was their annual bonus. Greed was their god.

According to Salowe-Kaye people have come to NJCA, who were so proud of their initial home purchase negotiated with a predatory lender they had videotaped it for posterity, recording lenders telling borrowers such things as: "Oh, you don't need a lawyer you can use ours." Others signed documents, but were not given copies.

Meanwhile, in 13 years the NJCA helped negotiate 12,000 CRA loans through its partnership with banks. The loans are for 30 years with fixed rates and no points. They do not offer "balloon rates," adjustable rate mortgages or other gimmicks.

In some cases NJCA will work for several years to improve a client's credit rating, before a deal is struck. Once the credit rating has been improved - and NJCA and the banks have done their due diligence - the loan is approved.

"Nobody needs a house immediately. They may need an apartment, a place to stay. But there's no emergency to purchase a house," said Salowe-Kaye.

One requirement of a client purchasing a house with the NJCA is their signing an agreement, allowing the bank to contact NJCA if a client is delinquent on a payment for 30 days. The counselor returns to help straighten out the situation.

The default rate on the 12,000 loans is "almost negligible."

A similar CRA program in New York negotiated 17,000 fixed-rate 30-year mortgages, and has had exactly five foreclosures.

"When you underwrite appropriately — and better still, offer first-time homebuyers adequate financial counseling so they understand the terms to which they are committing — they do quite well," said Michael Rubinger, president of Local Initiatives Support Corporation, a national organization that coordinates community development.

"Mortgages originating from banks under CRA are among the soundest in the nation," said Paige Carlson Heim, head of the Housing and Community Network of New Jersey.

These experiences are enough to give "regulation" a good name.

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