Members of Gov. M. Jodi Rell’s Task Force on Subprime Lending – including Fannie Mae’s Sharon Gowen, center – listen to testimony during a hearing Tuesday at the State Capitol’s Legislative Office Building.
I know firsthand the dangers of the predatory lending practices that lead to foreclosure because I am currently in jeopardy of losing my own home due to foreclosure.”
In tearful testimony, Bridgeport resident Donna Pearce was among those who described to Gov. M. Jodi Rell’s Task Force on Subprime Lending how she has been victimized by predatory lending. Meeting in the State Capitol’s Legislative Office Building on Tuesday night, the 31-member task force sat in a two-tiered, horseshoe-shaped platform for the public forum.
The task force includes representatives from Fannie Mae, Freddie Mac, the U.S. Department of Housing and Urban Development, and banker and mortgage associations. Its two co-chairmen are Connecticut Housing Finance Authority President Gary King and Connecticut Department of Banking Commissioner Howard Pitkin.
Sitting in front of the task force, Pearce admitted to feeling embarrassed and intimidated when giving her testimony. But she continued, providing a personal, living example of the state’s growing number of foreclosures.
The signs of trouble first appeared for Pearce last summer, when she closed on her condominium. The interest rates were higher than she had been promised, and, to her surprise, she was given a piggyback loan – one loan for the mortgage and another for a down payment. All of that ran contrary to what she had been told by her broker leading up to the closing, Pearce said.
“Like many borrowers, I was steered into this adjustable rate without being given a choice, and I was lied to by my broker about how it worked and what I could do,” Pearce said. “Even though I had good credit, I was given two separate loans – one with an 8.6 percent interest rate, and another with a 13 percent interest rate. When I asked my broker about it, she told me not to worry because I could just refinance in six months.”
She took the broker at her word, and proceeded with the closing.
“So, six months later when I tried to refinance, I was told I had a prepayment penalty and that I could not refinance anyway because I did not have enough equity in my home,” Pearce continued. “If my broker had been required to tell me the truth, I would have a lower interest rate than I do today and would not be in jeopardy of losing my home.”
Despite the costs of the loan being higher than planned, Pearce – with help from her family – made her mortgage payments until this spring but stopped after she learned she would not be able to refinance. Consequently, she began receiving notices of foreclosure.
“Foreclosures not only harm individual families, but also entire neighborhoods, due to the increase in vacant homes and the decrease in property values,” Pearce said. Families in situations similar to hers are desperate to sell their homes to avoid foreclosure, she added.
“Take a ride through Bridgeport and you’ll see how many homes are for sale,” she noted. “The lawns aren’t cut anymore because the people don’t care.”
‘Enduring Ingenuity’
Pearce has joined the Association of Community Organizations for Reform Now, or ACORN, and is hoping to find a way to save her home. Meanwhile, she said, the clock is ticking on her current mortgage’s interest rate, which is due to reset higher next year.
She encouraged the task force to pursue ACORN’s policy recommendations, such as requiring lenders to provide homeowners with information about nonprofit housing counseling agencies, particularly with any late payment or foreclosure notices; providing homeowners who face foreclosure with an automatic one-month extension if they begin working with a housing counseling agency; and requiring lenders to work with housing counseling agencies to help borrowers find a way to keep their homes.
“If the counseling agency finds that the borrower should be qualified for a lower interest-rate loan than they are currently in, lenders should be required to work out a deal that enables the homeowner to make affordable payments and save his or her home,” Pearce said.
“When I closed on my home, I was the happiest person in the United States at that point,” Pearce said. “And now, I am the saddest person because of the situation I’m in.”
Her situation, however, is not unique, as was pointed out by testimony from Attorney General Richard Blumenthal.
“My office has been inundated with complaints and inquiries,” he told the task force. Of particular concern right now, he noted, is a form of predatory lending disguised as programs to “assist” homeowners facing foreclosure.
There are many variations, but “most result in ruin to the homeowner,” Blumenthal said. “What we’re seeing is the endless and enduring ingenuity of financial predators in this area.”
Prepayment penalties, deception and misleading statements represent some of the common denominators in predatory lending, the attorney general added. He called on the task force to make sure “adequate and complete information is provided to the consumer” in the mortgage process.
Blumenthal also called for additional resources for the Department of Banking to help with investigations into predatory lending. “Any new or existing law – they are only as good as the enforcement,” he said.
“We have a role to play in protecting our citizens,” he added. But he also cautioned the task force not to go so far as to “choke off” all subprime lending. Overreacting to the problem, he noted, could mean the end of loans for people with prior credit problems.
“The answer is not to end subprime lending,” he said. “The reaction has to be a balanced one.”
