Subprime Lenders: Equal Opportunity Destroyers

As the subprime mortgage crisis widens, so do the investigations of subprime lenders. Many are guilty of pressuring consumers into high-priced, high-risk loans, and the damage extends across a broad demographic spectrum.

Since 2004, about $1.5 trillion has been loaned to high-risk borrowers, at high rates of interest. Most of these loans were subprimes, a sector of the lending industry that few Americans had even heard of until a year ago. Subprime problems have leaked into other areas of consumer finance and have negatively impacted everyone's ability to borrow. Today, "subprime" is a household word and dominates the headlines.

Cheap mortgages no more

Subprime mortgages were intentional and strategic, as lenders attempted to capitalize on consumer demand for cheap mortgages during an era of rising real estate prices. In essence, banks and mortgage companies were betting that the premium rates associated with subprime loans would fatten their profits. Some lenders pressured consumers to accept added risk and borrow more than they actually needed or could afford to repay. When the housing bubble burst, so did the subprime loan sector, and both borrowers and lenders are now suffering the financial fallout.

Bleak house

A glut of nearly 4.5 million homes-in other words, a ten and a half-month supply-is now for sale. In normal markets, the nation carries a one- to three-month supply; today's numbers represent the largest excess inventory in more than 12 years. And the situation doesn't appear to be getting better anytime soon. The confidence of America's builders, as measured by the National Association of Home Builders/Wells Fargo Housing Market Index, is the worst it's ever been in the 23 years since the monthly survey has been in existence. Usually, builders and realtors are the last to admit that the housing market is in the tank; but now, they, too, acknowledge the troublesome facts. In nearly half a dozen states across the U.S., one out of every 100 households is affected by foreclosure. More than half a billion dollars worth of adjustable rate subprimes will reset within the next 12 months. As they get increasingly expensive, more homeowners will become delinquent on their loans.

High-risk loans were made across the board, in both rich and poor neighborhoods, and lenders continued to sell them, even after problems emerged. Higher-income buyers used subprimes for purchases of more expensive property or to buy second homes. In addition, borrowers in every income bracket used subprimes to refinance their loans because they could get dirt-cheap introductory rates. Many consumers withdrew cash in the form of equity loans to pay for living expenses, using their homes as ATM machines. For many, that meant buying a lifestyle that they couldn't afford and using their primary residence as collateral. When prices fell, equity dried up, and so did the easy money. Now, many of those homeowners are scrambling to avoid bankruptcy, despite the fact that they have white-collar jobs and substantial personal income.