State must protect future subprime borrowers

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Here's the subprime mortgage crisis in a nutshell: Too many

borrowers were lent too much money at too high interest rates through brokers

too interested in their own profit margins in order to feed the appetites of

lenders and mortgage-backed securities investors too hungry for high returns to

see that the whole scheme was, well, too good to be true.

A trillion-dollar mortgage market hinged on financially unsophisticated

borrowers making rational decisions about a complicated financial transaction

that they might make two or three times, at most, in their entire lives - with

little understanding of the marketplace, the range of products available and

offered, the deal terms commonly used, or the financial interests and

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alignments of those selling them the products.

While most of the attention has been on Washington and Wall Street, most

mortgage banks and brokers are chartered by the states. And New York can and

must act to prevent a similar crisis from ensnaring future borrowers.

First, most borrowers incorrectly assume that their mortgage broker is

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working for them, trying to secure the most advantageous rate and other terms

on their behalf. In fact, mortgage brokers owe borrowers no such duty. That's

why so many borrowers ended up in loans they can't possibly afford.

Your stockbroker can't recommend a risky stock unsuitable to your

investment objectives. Your real estate broker can't have a secret side deal

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with the buyer of your house to pocket a percentage of the amount the broker

saves the buyer by convincing you, the seller, to lower your price.

So why can your mortgage broker do so? That's why every witness at the

Assembly subprime-lending hearing in May supported imposing some level of legal

duty on brokers to act in the best interest of borrowers.

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Next, let's give borrowers of six-figure mortgages at least as much

information, in as clear a manner, as we give people who sign up for a

$500-limit credit card. If credit card companies must provide potential

customers with a clear depiction of the card's essential terms - including the

actual interest rate, minimum payments, finance charge calculations, whether

the rate is fixed or merely "introductory," etc. - why can't mortgage lenders

provide borrowers up front with a simple and uniform table depicting a

borrower's real post-"teaser rate" monthly payment, together with the annual

property tax and insurance payments, as well as the recommended amount of

monthly income that a borrower should have in order to assume such obligations?

Finally, let's level the legal playing field. How are lenders getting away

with taking advantage of distressed borrowers in the foreclosure process by

tacking on improper charges, suing for inflated amounts and generally running

roughshod over the rights of borrowers?

Simple: Lenders have lawyers and borrowers don't. If borrowers had money to

pay a lawyer, they'd have money to pay their mortgage. Piling on to this

imbalance, most mortgages require the borrower to pay the lender's legal fees

in a successful foreclosure action, but they give borrowers no reciprocal

right. That's why for most borrowers in foreclosure, the only option is


But if New York imposes a reciprocal right to attorneys' fees in

residential leases, why can't we do the same for residential mortgages, and at

least allow borrowers the opportunity to present whatever valid legal defenses

might be available to them?

At this stage, there is no debate on how we got into this subprime mess.

But do we have the will to make the changes necessary to make sure it never

happens again?

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