Page 22 - Impact: Collected Essays on the Threat of Economic Inequality

20
qualified for conventional market terms and thus overpaid for their mortgage loans .4 But it is also true that given superheated investor demand for residential mortgage-backed securities, many borrowers with bruised credit histories or inadequate income or down payments under conventional lending standards nonetheless were given home loans in exchange for higher fees and interest than prime rate borrowers paid .
Because home prices in most U .S . locations had risen considerably during the previous decades, the subprime lending model was infeasible under traditional mortgage lender underwriting standards . Higher interest rate loans meant higher monthly loan payments, thereby imperiling the traditional lender insistence on a debt-income ratio that capped home-related expenses, such as mortgage loan payments, property insurance and taxes, and condominium or homeowner association fees, at a reasonable amount in relation to anticipated income to ensure the borrower had adequate monthly income for her other living expenses . Higher loan fees meant either borrowers needed a larger savings account to pay the costs at closing, or that the fees, added to the loan balance and paid over the life of the loan, would increase the monthly payments and thus imperil debt ratio standards .
All would be well if borrower incomes and savings, inexorably connected, were rising sufficiently to keep mortgage loan payments in balance with what had been seen as a comfort zone for the borrower’s home debt and total debt from other sources in relation to monthly income— typically between 30 and 40 percent .5 But at the same time that home prices and mortgage loan costs were rising, employee wages for the last few decades stagnated or even decreased .6 With wages stagnating at a time of rising consumer prices not just in the housing market but across the marketplace to encompass gasoline, utilities, and food prices, savings accounts also suffered .
Inadequate income and savings lurk behind much of the subprime loan experience . As an example of this dynamic, a 2007 Oregon appeals court decision awarded compensatory and punitive damages to borrowers duped by a subprime lender into an unfair refinance of their home loan .7 The borrowers, both Mexican immigrants, had emigrated from Mexico in the late 1980s and
4 For discussion and statistics on the disproportionate subprime borrowing of Latino/Latina and Black residents, see Vicki Been et al., The High Cost of Segregation: Exploring Racial Disparities in High-Cost Lending, 36 fordham urB. l.J. 361, 362, 364 (2008) (discussing how U.S. Blacks were almost three times more likely to receive a subprime home purchase loan than Whites, and Latinos/Latinas 2.6 times more likely; also addressing that high-cost loans were much more often issued to borrowers of color in New York City than White borrowers); andré douglas pond cummings, Families of Color in Crisis: Bearing the Weight of the Financial Market Meltdown, 55 how. l.J. 303, 310-12 (2012); Raul HinoJosa OJeda, AlBerT Jacquez & Paule Cruz Takash, The end of The american dream for Blacks and laTinos (2009).
5 See generally Jason Hahn, Debt to Income Ratios, Diving Deeper (June 17, 2010), http://realestate.aol.com/ blog/2010/06/17/home-affordability/ (suggesting some lenders may allow even greater total-debt ratios). These numbers varied widely over time and by lender and loan program, and by the borrower’s credit score and income level. Traditionally, most lenders also deploy a front-end ratio in which the total housing expenses (exclusive of other debt such as credit card balances, student loans, and car loans) do not exceed a smaller percentage of income, typically around 28 to 30 percent. Id. For purposes of the new ability to repay standard adopted pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376, the mortgage lender generally must not allow the back-end, total debt, ratio to exceed 43 percent in order for the loan to be a qualified mortgage that presumptively satisfies the new ability to repay standard.
6 See David Cay JohnsTon, divided: The perils of our growing inequaliTy x-xiii (David Cay Johnston ed., 2014) (detailing the stagnation or shrinkage of income for most U.S. residents in recent years); Dave Johnson, 9 Photos That Reveal America’s Obscene Division of Wealth, AlTerneT (Jan. 6, 2015), http://www.alternet.org/economy/9-photos-reveal- americas-obscene-division-wealth (discussing how between 1979 and 2008 real incomes rose 73 percent for U.S. families in the top 5 percent of income, whereas they decreased 4.1 percent for families in the lowest income fifth, and the rest of U.S. families saw stagnant or very little increase in real income).
7 Vasquez-Lopez v. Beneficial Oregon, Inc., 152 P.3d 940 (Or. Ct. App. 2007).
Impact: Collected Essays on the Threat of Economic Inequality