Building Bad Loans

New Orleans        A friend sent me an interesting report done by the Laborers’ International Union called “The Ticking Time Bomb:  Adjustable Rate Mortgages and Depreciating Home Values in New Subdivisions.”   Our old comrade and colleague, Jordan Ash, seemed to be the principal author of the report, and we were curious how he had been spending his time since he left last year as director of the ACORN Financial Justice Center.  

    LIUNA had focused on the Phoenix real estate market and an interesting, but largely unrecognized tawdry tale in the generally bad story of the implosion of the subprime market.  According to the “Time Bomb,” a number of big subdivision builders on the housing construction side had created either captive or allied mortgage interests to handle the loans they used to sell the houses they had build on spec.  The report was especially critical of Bezar Homes, KB Homes (and its subsidiary KB Countrywide), Richmond American, Shea, Pulte,
Meritage, and Ryland.  All of these are among the largest homebuilders in the country.  

    The homebuilders operating as subprime mortgage lenders, often steering homebuyers to their own mortgage companies despite the competition and qualifiers, issued a lot of Option ARMs and that is the ticking time bomb since they start to adjust in 2010 and 2011.  The LIUNA report paints a picture that could dot street after street in these new moderate income working subdivisions with for sale and foreclosure signs.

    The key recommendation was a head shot at the industry.

The U.S. Department of Housing and Urban Development has proposed a change to the Real Estate Settlement Procedures Act (RESPA) that would make it a potential RESPA violation when a builder uses economic incentives or disincentives that have the effect of steering homebuyers to the builder’s mortgage company. Although this is a step in the right direction, HUD should completely repeal the 1983 amendments to RESPA that allowed builders and other businesses to make referrals to affiliated businesses.

    Reading the report about this little known, but terrible abuse, it was clear that LIUNA has done a service by pointing out this problem in such a compelling fashion, and anyone with an interest in financial justice should join in pushing HUD in this direction.  

    Foxes can build the chicken houses perhaps, but they shouldn’t steer the chickens into such a deadly cage.

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