Subprime AdventuresFebruary 1st, 2008

For the last four years, my law practice has consisted mainly of home mortgage closings for people refinancing their debts. Typically, they’re paying off credit cards and car loans or substituting fixed-rate debt for variable rate debt or financing their kids’ education. Some are in straits, with past due taxes or other delinquencies, and some are already mortgaged to the hilt.

I act as signing agent in most of these transactions and don’t represent either the bank or the borrower, and so I’m free to counsel a borrower who inquires. I offer only legal counsel and not financial guidance. I’ve been exposed to dozens of lenders and hundreds of borrowers, and I’ve seen a lot.

I’ve seen huge disparities between the deals obtained by people with exemplary credit and people with average ratings. The people who are financing a cruise or a swimming pool borrow at rates far below those who are barely making their “nut” every month. The theory is that the bank bears less risk and so can afford to offer better terms. It might easily be mistaken for poor people subsidizing the credit of comfortable people.

I’ve seen borrowers in trouble–they don’t usually tell me why, but death, marital breakdown, unemployment, and illness are often apparent from the documents–pay ten or fifteen thousand dollars in fees out of the proceeds of a loan that yields them nothing but respite from creditors. A few lenders have sent me out with documents showing a bottom line to the borrower that was thousands of dollars short of the amount expected. Some of these people, when I advised them not to sign, felt they had no choice and took the deal anyway.

“I thought this was a fixed-rate loan,” a borrower might complain.

“For three years,” I’d answer, “then variable. Better call the loan broker. ” Who’d not be there, most often. I quit conducting transactions for a couple of lenders, and I’m persona non grata with a couple of others that I caught in predatory practices like these. One lender wanted me to backdate documents. I sent an email to my state attorney-general on that one, but I never heard back.

It never occurred to me that the high-interest/high-risk loans I was handling were a major driver of the U. S. economy, but that seems to have been the case. I did notice that the appraisals were coming in a little high. Three hundred thou for a six-room ranch in West Hartford (four hundred for the same thing in Fairfield) seemed a bit steep. Two working people with two jobs each can’t afford that kind of mortgage and still eat. Either working people’s wages would have to go up by a third, or house prices would have to come down. It looked like something that would pop if it didn’t deflate soon. I called that one.

My practice is pretty dead, and I receive intimations every so often from people in banking and real estate that things are going to get worse before they get better. The home mortgage industry, in which the responsible lenders share the same pool as the racketeers, seems to have closed up shop for now, at least to the average borrower. A little regulation could have gone a long way here, but it’s too late now. And it’s hard to see how doling out a few hundred bucks to voters in an election year will help debtors who are in trouble or make it possible for ordinary people to own a house.