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Last Updated: Wednesday, 25 April 2007, 22:53 GMT 23:53 UK
Poor Americans hit out at mortgage claims
By Hani Shawwa
BBC News, New York

When Cynthia and Douglas Brown arrived with their two young daughters at their new home in the New York borough of Queens, they thought they had at last found a haven from the inner city life that had so troubled them in the past.

Douglas and Cynthia Brown
Douglas and Cynthia are getting help from their lender

"We used to live in a violent building in Harlem, troubled by rape and drugs," says Cynthia.

"One of my daughters was too frightened to go to the store. I was worried about leaving them alone."

The couple, each aged 43, decided they had to leave their small apartment in order to survive as a family.

Cynthia contacted real estate agents in Queens and after a long search she eventually fell in love with a spacious red brick house, with three large bedrooms and a garden where her children could play.

The family signed what they thought were the appropriate documents and moved in a month later.

However, their hopes and aspirations for a new life were soon replaced by angry calls from their bank and financial misery.

Poor briefing

To their horror, the Browns discovered they had fallen into a trap which has ensnared several other low-income families looking to get on the property ladder.

Rich or poor. Everybody needs a place to live
Cynthia Brown

They had unknowingly taken out two costly sub-prime mortgages.

Sub-prime mortgages are typically given to borrowers with poor credit history. As they are seen as a higher risk group, their loans carry interest rates greater than those offered to borrowers with better credit.

In the case of Cynthia and Douglas, their first loan was for about $381,000 (190,000) with a variable interest rate of 8.25%, which could balloon to a maximum of 14.25%. The second was for $96,000 at a fixed rate of 11.4%.

According to industry estimates, the average for a family in the US is a mortgage of about $275,000, at a fixed rate of 6%.

"The contract was not explained to us thoroughly," Cynthia angrily complains.

"They just said sign here and sign there and the house is yours."

Favourable fudge?

The family started to receive payment demands from their bank for $3,100. They had been expecting something closer to $2,000.

Peggy Morris
Peggy Morris studied the documents carefully

Douglas, who works in the paper industry, only earns $23,000 a year.

If he had paid what the bank wanted, he would have nothing for the rest of the family.

The family panicked and expected the worst - to be kicked out of their property and become homeless.

But with the aid of Peggy Morris, a neighbourhood housing advocate, they also found out their $476,000 house had been overvalued, was carrying several building violations and that someone involved in the process had overstated Douglas Brown's income on the mortgage forms at $50,000.

Mortgages experts say lenders sometimes massage borrower's figures in an effort to get the loan off the ground.

This can include increasing the value of the house or overstating a client's income.

"Brokers think they are doing their borrowers a favour by getting them the mortgages in the first place," says Guy Cecala, the publisher of Inside Mortgage Finance in Maryland.

"The lenders assume that the property will appreciate and thus will compensate for any fudging."

Borrowers in trouble

Sub-prime mortgages have received a lot of negative publicity in recent weeks in America.

US civil rights groups and politicians in Washington DC are now calling for sub-prime borrowers like the Browns to be bailed out of their seemingly impossible predicaments.

Douglas and Cynthia Brown
Revaluing the property might provide a solution

The housing market is currently presenting a far from pretty picture. According to data for the last three months of 2006 from the Mortgage Bankers Association, late or missed payments on mortgages increased to 4.95%. Looking at just the sub-prime market, the figure jumps to 13.3%.

Lenders launched repossession actions against more than one in every 200 mortgage borrowers in the period. The figures were the highest in the 37-year history of MBA's national delinquency survey.

The Center for Responsible Lending, a non-partisan think tank located in North Carolina, says the sub-prime market has produced more than $2 trillion in home loans over the past nine years - but warns that these loans have led or will lead to a net loss of homeownership for almost a million families.

No intervention, please

But the mortgage industry is keen to defend itself against the onslaught of bad press.

Chris Stinebert, president and chief executive of the American Financial Services in Washington DC, insists that sub-prime lending "has played an important role in the home ownership boom of recent years".

"This access to credit should be preserved so that deserving borrowers have a means to obtain homeownership and other long-term goals," he says.

Indeed, some experts believe that any intervention in the industry would make matters worse.

Joseph Gyourko, professor of real estate and finance at the University of Pennsylvania's Wharton School, warns of the risk of "moral hazard" - the distortion which happens if people enter into contracts with the expectation that a bail-out may mean they do not have to honour them.

"We don't understand this very well right now, so any regulation is probably going to be wrong or imprecise," he says.

Blaming the market

However, it is not only consumers who are suffering.

Sub-prime lenders also are feeling the heat - and it is a big industry. According to Inside Mortgage Finance, it makes up one fifth of the total $10.5 trillion total mortgage industry market.

Out of the top 25 sub-prime lenders monitored by the publication, about half are in some form of financial distress or are up for sale.

The most recent case has involved New Century Financial, which was one of the largest sub-prime lenders in the US.

New Century sought protection from creditors after it was forced by its backers to repurchase billions of dollars worth of bad loans.

The company immediately cut 3,200 jobs, more than half of its workforce, as a result of the move.

Guy Cecala blames these latest problems on the stock market.

"The sub-prime market has been driven by Wall Street and investors," he says.

"With the rise of late or missed payments, investors have been scared and are now pulling out of the business. It is not just about consumers."

Despite the torrent of bad news associated with sub-prime mortgages, there is a ray of light for Cynthia and Douglas.

After pressure from Ms Morris, their bank says it is now interested in helping them.

They are hoping their house will be revalued and they will get a better deal. By doing so, their repayments should fall to more acceptable levels.

"I wouldn't want to see anybody else go through this experience with sub-prime mortgages," says Cynthia.

"Rich or poor, everybody needs a place to live."

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