City Council calls on Fed to act against predatory lending practices

The Federal Reserve should do something about predatory lending, the Seattle City Council declared Monday.

Home foreclosures have surged nationwide in recent months, driven largely by defaults of subprime loans, which generally serve people with poor credit. Many borrowers did not understand the terms of their loans, which often started with low, teaser payments and included prepayment penalties that made it hard to refinance into a different mortgage after the teaser payments increased. Declining home prices in many areas also made it harder for people to get out of bad loans.

The Association of Community Organizations for Reform Now, which lobbied for the City Council resolution, released a report Monday estimating that foreclosures could cost property owners, local governments, lenders and investors in the Seattle area more than $385 million in losses.

"I'm here because there's a crisis in my neighborhood," John Robert Jones Jr., president of Washington ACORN, told the City Council.

In a report released last week, the Joint Economic Committee of Congress predicted about 1.3 million of the nearly 7.4 million outstanding subprime loans would go into foreclosure from the third quarter of 2007 through the end 2009 if housing prices continued to drop and no action was taken to curtail foreclosures. That would directly destroy about $71 billion in housing wealth and cut the value of neighboring properties by more than $32 billion, the report says.

The national numbers include more than 21,000 foreclosures in Washington state, out of nearly 157,000 subprime loans, with $1.4 billion in direct losses and $340 million in lost value for neighbors.

ACORN called on lenders to rework unaffordable loans, local governments to take emergency actions to prevent the decline of neighborhoods with high levels of foreclosures, state and federal legislators to pass strong legislation against predatory lending and borrowers to seek home-ownership counseling through organizations certified by the U.S. Department of Housing and Urban Development.

The resolution, which the City Council passed unanimously, details questionable lending practices and asks the Federal Reserve to prohibit lenders from marketing adjustable-rate mortgages with teaser rates that adjust to become unaffordable, ban substantial prepayment penalties on adjustable loans and declare it unfair and deceptive for lenders not to tell borrowers whether property taxes and insurance are included in mortgage payment calculations.

While several council members agreed they were happy to take a stand on the issue, Councilman Peter Steinbrueck suggested that working with state regulators and legislators might be more effective. "I think our direct influence with the Federal Reserve is probably negligible to nil," he said.

FORECLOSURE REPORTS

To see the congressional Joint Economic Committee's report on home foreclosures, go to jec.senate.gov.

For the report from the Association of Community Organizations for Reform Now, go to acorn.org.