By Cliff White 

Staff Writer

Have you heard this one?

A couple walk into a mortgage brokerage and ask for a loan. They are turned down because they don’t qualify. But the broker advises the couple to form a commercial limited liability company and assists them in doing so. The couple is referred to another company, which approves them for a commercial loan. The company the broker recommended to the couple was a subsidiary of the same lending agency. 

There’s no punchline and this is no joke. It is just one true example of the excesses to which both lenders and borrowers went during the heyday of the sub-prime loan, said Maine Consumer Credit Protection (MCCP) Department Director Will Lund.

“The company had referred this customer to itself,” Lund said. “The case is illustrative of some of the pernicious practices that contributed to the current foreclosure crisis. Mortgage companies should not steer consumers who do not qualify for mortgages to more risky products lacking consumer protections.”

Subprime lending is the granting of loans at different rates than the prime rate recommended by the government-sponsored Federal National Mortgage Association (Fannie Mae), often given to those who represent greater credit risks to the lender, Lund said. Such loans usually had untraditional or unconventional terms, such as interest-only payments, “pick-a-payment” loans, where borrowers choose their monthly payments, and adjustable-rate mortgages, where a low initial interest rate adjusts to a higher rate after a certain time period, Lund said.

“Wall Street realized how much money there was to be made on sub-prime mortgages, how much people were willing to pay in interest if their credit wasn’t stellar,” Lund said. “That was really the fuel that drove the machine – as long as there was a willing buyer for these products, the business kept growing.”

Some mortgage companies crafted practices to take advantage of the favorable lending climate which stepped over legal lines, targeting borrowers with predatory practices such as deliberately misleading clients into loans with excessive fees and hidden terms, Lund said.

While the practice of sub-prime lending has been around for more than a decade, the sub-prime mortgage crisis in which the country and the state are currently mired has its roots in the discovery by Wall Street investors about four years ago of the practice of “securitization,” Lund said.

“‘Securitization’ was what happened when lending agencies found out they could sell the ownership of sub-prime loans to investors,” Lund said.

Assistant Attorney General Linda Conti, who prosecuted the civil trial of the case mentioned above against Downeast Mortgage of Kennebec County, said securitization has made the prosecution of other cases of abusive or predatory lending practices extremely difficult.

“When the company that made the loan is now out of business and the loan itself has been sold 19 times to different services, it makes it very difficult to sue anyone because the actual person – or even the company – who made the loan is no longer around,” Conti said.

While legislation passed last year in Maine tightened restrictions on predatory practices, the effects of sub-prime loans granted in previous years are catching up with Mainers and others around the country. Default and foreclosure rates have skyrocketed, Lund said, along with the number of people calling in dire financial straits, describing predatory lending practices used against them when they took out their loans. 

“In the past few years, companies have competed with each other to see who can create the most innovative, some would say exotic, loans,” Lund said. “Now there are areas of Maine with 4 to 6 percent of all loans at the foreclosure stage, which is much higher than it should be.”

Lund said he does what he can to help out those who call his office looking for assistance, a total that amounts to more than 400 annual mortgage-related complaints. He sorts borrowers into three categories – those who are victims of illegal practices, those whose loan was appropriately made but who have experienced some sort of temporary life change such as unemployment or illness that might have briefly affected their ability to make payments, and those “whom loans should never have been made in the first place, who can’t make payments now and won’t be able to in the future,” Lund says.

Lund refers those in the first category to the attorney general’s office for probable instigation of a lawsuit. For those in the second category, he attempts to get the lender and borrower to put the payment process back on track.

For those in the third category, Lund said, “We do what we can, but realistically, the options are few.”

The MCCP and attorney general’s office have both entered into a partnership with non-profits Pine Tree Legal and Coastal Enterprises, which offer legal assistance to sub-prime mortgage borrowers in danger of losing their homes to foreclosure.

Coastal Enterprises Senior Program Officer Carla Dickstein said a main bargaining chip used in negotiations with lenders seeking foreclosure is that the process is not profitable. 

“No one wins in a foreclosure,” Dickstein said. “For the borrowers, it means they won’t have a place to live, and for the banks taking possession, it means they will have to sell the house in a declining market, which can be difficult, while meanwhile the house isn’t being maintained and can fall into disrepair.”

Lending agencies have not been entirely receptive to restructuring loans to make them more affordable to the consumer, Dickstein said.

 “Truthfully, the kind of counseling we give has had only moderate success in getting lenders to restructure loans,” Dickstein said. 

Dickstein said York and Cumberland counties have the highest total number of foreclosures out of all Maine counties, but it is a serious problem across the state.

“Legislation was too late in happening, and while the state had housing counseling, it was mostly for first-time buyers, not for loss mitigation and foreclosure prevention – those people are just being trained now,” Dickstein said.

Dickstein predicts the numbers of foreclosures will only increase in the near future.

“I don’t think any of us knew the bubble was going to burst like this. We certainly never predicted the kind of contagion this collapse has created,” Dickstein said. “A study done by our group predicts even more foreclosures in the future – we aren’t even in the worst of it yet.”

The situation is difficult and looking bleak, Lund said.

“There is such a conflicting message in this country right now,” Lund said. “Home ownership is almost always subtitled ‘the American dream,’ and here in Maine residents enjoy a higher rate of ownership than almost any other state,” Lund said. “On one hand, it’s what we’re all supposed to strive for. On the other, no one was willing or able to say that maybe in some circumstances it is unrealistic for someone to own a house given their income.”

The conflict is at the heart of the crisis, Lund said.

“The dream remains a good thing, but for the first time in a long time we’re seeing the government move in and say, ‘Under certain circumstances we are going to supplant your judgment with ours.’ It seems the determination has been made that it is difficult for all of us to determine and decide for ourselves that there are some products that simply should not be offered to people,” Lund said.

Regulation is more thorough due to recent legislation, Dickstein said, but still not perfect.

“The best thing for the long term is to prevent the practice before it happens,” Dickstein said. “Educate yourself so you don’t get fooled.”