The entire country is suffering from an economic crisis of historically huge proportions, and most of the trouble can be linked to "bad credit" mortgages. Everyone is blaming someone else, but mortgage brokers are the biggest targets.

Subprime loans were originally created to offer mortgages to a small niche market of customers with bad credit who were rejected by conventional lenders. Then came the 21st century- the era of reckless underwriting, predatory lending, and wildly popular "liar loans," which are now known around the world as notorious subprimes.

Subprime reaches celebrity status

It's of little surprise that the American Dialect Society, a scholarly organization founded in 1889 and dedicated to the study of language usage, voted the term "subprime" as the 2008 Word of the Year. Once an obscure expression, it catapulted to the status of a household word because millions of homes fell into foreclosure behind these bad credit loans. Government regulators, consumer advocacy groups, and borrowers often trace the roots of the subprime debacle to an essentially unregulated mortgage brokerage industry.

Pointing finger at brokers

A new study by the Center for Responsible Lending faults brokers for putting homeowners into these expensive, high-risk loans, and says that they did so just to pad their own pockets with fat commissions. Research conducted by the advocacy group indicates that subprime borrowers who dealt with mortgage brokers paid more than 3 percent more than borrowers who got the same loans directly from lenders.

Of course, brokered loans always involve commissions paid to the broker as compensation for the service of shopping around for the best loan. But critics say that lenders paid incentives that influenced the process and resulted in the unethical practice of steering consumers into subprimes even when they didn't need them.

Pointing finger at lenders

Mortgage brokers deny culpability and defend themselves against the widespread blame. The National Association of Mortgage Brokers says that such criticism only hurts consumers by discouraging them from using bad credit loans. These provide valuable help to Americans who want to buy homes, but are unable to without the help of subprime lenders.

Brokers say that the real problem is faulty underwriting on behalf of lenders who marketed the loans and aggressively offered them to the borrowing public without regard to whether consumers could repay them. The loans became known as "liar loans" because lenders relied on borrowers to confirm such vital statistics as annual income, not prudent underwriting. Many borrowers fudged the numbers to their own advantage, misrepresenting and overstating their financial assets. By doing so, they were able to get bigger loans, buy more expensive houses, and put themselves and their lenders at greater financial risk.

It may be hard to prove who's really at fault. Accountability probably belongs to lenders, government officials, brokers, and borrowers alike. Nobody wants to share the blame. But one thing is sure-all Americans have been sharing the ugly fallout from bad credit lending practices.

Published on June 13, 2008