The New York Times: Mortgages Storm Clouds Over Risky Loans

By Bob Tedeschi
Published: January 7, 2007

In recent years, borrowers have flocked to riskier mortgages that gave them the means of keeping up with an overheated housing market. Now some advocacy groups say that as delinquencies and foreclosures mount, so too will lawsuits against lenders.

''I think a class action is coming,'' said John Taylor, the chief executive of the National Community Reinvestment Coalition, a Washington group that is an advocate for low-income borrowers. ''It's a storm cloud that's waiting to really open up and rain on the lenders' parade.''

Mr. Taylor contends that lenders have marketed their riskiest loans to low-income borrowers in violation of so-called fair lending laws, which require that a loan be made only when there is a substantial likelihood of repayment.

''These lenders and brokers will be hauled in front of judges and others who'll argue that these people knew these loans would get the borrowers into trouble,'' Mr. Taylor said. ''The explosion in foreclosures and delinquencies will mandate that action be taken.''

Nationally, the rate of foreclosures has climbed recently, particularly among so-called subprime borrowers, whose lower credit ratings and incomes often limit their ability to qualify for traditional mortgages.

According to a report last month by the Mortgage Bankers Association, delinquency rates for the three-month period ended Sept. 30 rose to 2.44 percent from 2.29 percent for loans to those with high credit ratings, or prime borrowers. In the subprime market, delinquencies rose to 12.6 percent, from 11.7 percent.

The delinquency rate for subprime adjustable-rate mortgages jumped by nearly a point, to 13.22 percent. The New York region has been less affected because the local economy has been strong enough to help many borrowers make their payments and because subprime loans make up a smaller share of the market.

Those advocating legal action say lenders in recent years have approached more subprime borrowers with adjustable-rate mortgages that in past eras were reserved for people with higher incomes who could presumably afford to take greater risks.

Payment-option ARMs are perhaps the best example. Such loans allow borrowers to choose whatever monthly payment they wish, even if it means paying back less than the loan's nominal interest rate. In such cases, the loan amount actually grows until a certain point, at which time the loan shifts to a mandated monthly payment, often at much higher interest rates.

Payment-option ARMs had historically been the province of those who could depend on big annual bonuses to pay down loans they neglected most of the year. But more recently such mortgages have grown popular with borrowers who could not afford to buy a house unless they cut corners on the initial payments.

Many of these borrowers essentially bet that the value of their houses would climb quickly enough that they could use the accumulated equity to refinance with a more affordable loan. The recent housing slowdown has curbed such plans.

Mortgage lenders argue that if borrowers made those kinds of speculative bets, they did so willingly.

Ken Markison, senior director of the Mortgage Bankers Association, said that lenders generally have not given payment-option ARMs to subprime borrowers and that those with better credit have used such loans successfully. ''We don't believe there would be a basis for such suits,'' he said.

But Jean Constantine-Davis, a senior lawyer at the AARP Foundation, said that lenders sometimes qualify borrowers based on their ability to pay the lowest rate on an adjustable loan, not the maximum rate, while other lenders do not require adequate evidence that a borrower can repay. Such situations, she said, can serve as grounds for a lawsuit.

Still, anyone hoping for an easy release from a loan gone bad may not find much relief in any possible suits.

''I don't see this as a boondoggle for borrowers,'' Ms. Constantine-Davis said. ''But some of these situations are just so far out there that I suppose it's possible you could get the loan declared invalid.''

Copyright © 2007 by The New York Times Co.  Reprinted with permission.