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Wednesday, Feb. 13, 2008 03:43 am

Before the storm

Illinois AG’s report sheds new light on the true origins of the mortgage crisis

Untitled Document Even with a record number of homeowners defaulting on their mortgage loans, TSP-HOPE’s housing programs and services have remained unaffected, says the agency’s executive director, Ron Fafoglia.
Fafoglia says TSP-HOPE, which helps low-income people get homes, requires prospective clients to have a minimum credit score of 620. Also, he says, the organization doesn’t deal in risky subprime mortgages. As a result of TSP-HOPE’s rigid entrance requirements, Fafoglia says that no client of the program has ever defaulted. However, he also says that three of the organization’s homes were on the market for at least five months in 2007. “It’s the general malaise that is making people leery of buying a house at this time,” he says. By the end of 2007, the delinquency rate on mortgages across the country had reached its highest point in more than 20 years, and the foreclosure rate had set new records, according to the Mortgage Bankers Association, a national group that represents the real-estate-finance industry. Conventional thinking has held that the housing market began to implode once interest rates reset on a critical mass of adjustable-rate subprime mortgage loans, which are often sold to individuals who don’t earn a lot of money and whose credit is too poor to qualify them for traditional mortgages. Companies issuing these loans, which often come with high costs hidden in the fine print, have been widely criticized for targeting people who are most unlikely to meet the loan obligation. But a study released last week by the State Foreclosure Prevention Working Group, a multistate task force, concludes that some homeowners who took out subprime mortgage loans to finance a slice of the American dream were due for a rude awakening long before their interest rates increased. In other words, the loans were unaffordable from the beginning, says Illinois Attorney General Lisa Madigan. The report, Analysis of Subprime Mortgage Servicing Performance, states: “The rating agency Fitch . . . concluded that ‘poor underwriting quality and fraud’ may account for as much as 25 [percent] of the defaults. Fitch further commented that, ‘[t]here was the appearance of fraud or misrepresentation in almost every file.’”
Attorneys general from 11 states, including Illinois, commissioned the report to examine data from the nation’s top subprime-mortgage-loan servicers — firms that collect and manage mortgage payments and escrow accounts on behalf of lenders — to assess the scope of the U.S. foreclosure crisis and how loan servicers are responding to the meltdown. Robyn Ziegler, Madigan’s spokeswoman, says Illinois was invited to participate because the state is among the nation’s top 10 in foreclosures and because the state has a large number of subprime borrowers. Illinois also serves as the North American headquarters of one of the nation’s largest subprime lenders, HSBC. Blame shouldn’t be heaped on the mortgage industry, says Paul Lueken, president of the Illinois Association of Mortgage Professionals. He says that although some people might have been sold mortgages that they couldn’t afford, he doesn’t believe that origination fraud was rampant.  “When you do the a lot of the finger-pointing and you say, ‘Where did this all happen?’ you could look from Wall Street all the way down to the mortgage company down to, and primarily, the consumer,” he says. “First and foremost what our society lacks is people taking accountability for their own actions. Unfortunately, if you lose your job, that’s not the mortgage professional’s fault. If you got a divorce, that’s not the mortgage professional’s fault.”
Lueken attributes the current state of the housing market to falling home prices, saying that had home values remained high, consumers would have had an exit strategy from loans that they could no longer afford.  “Some people bought their home with the idea that they would sell it quickly and make a large profit. Then the market turned on them and they couldn’t afford it, but they thought that they weren’t going to have to afford it.”
Fafoglia says that TSP-HOPE plans to build 15 homes in Springfield this year but admits that selling them could be a challenge because many people are wary of the housing market right now. “When you’re a first-time homebuyer and you hear about all these problems with people going broke and losing their homes, and you’re not educated on how the system works, people can be intimidated,” he says.  

Contact R.L. Nave at rnave@illinoistimes.com
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