Subprime lenders push back

NEW YORK (CNNMoney.com) -- Everyone is blaming "explosive ARMs" for the crisis in subprime loans. But several spokesmen for the mortgage industry told Congress this Thursday that these variable mortgages have not contributed much to rising default rates.

Testifying at a Senate Banking Committee hearing, Sandy Samuels, an executive with Countrywide Financial, said the spike in recent delinquencies is not a result of the failure of hybrid ARMS, ones with low "teaser" rates and payments that jump explosively after the first two or three years. Countrywide is a leading provider of subprime loans.

The majority of hybrid ARMs have not yet gone through a reset, said Samuels. Samuels said that during the past five years Countrywide had issued approximately 540,000 of these loans with only 20,000 going into foreclosure.

Brendan McDonagh, CEO of HSBC Finance, another big subprime provider, and Andrew Pollack, president of First Franklin Financial, both reported few problems with delinquencies on the products.

Scott M. Polakoff, chief operating officer for the Office of Thrift Supervision, told the committee that problems in local economies are responsible for most of the problems, particularly in areas like Ohio, Pennsylvania and Michigan.

But according to consumer advocates at the hearing, ARMs have had an impact.

One consumer who spoke at the hearing, Jennie Haliburton, told of how she took out a mortgage on her home a few years ago. She told her mortgage broker that she could afford a payment of $700 a month. He convinced the retiree to bump that up to $800, and Haliburton took the loan without realizing even that payment would rise. "Next thing I know, I'm paying $1,100 a month," she testified.

Another consumer, Al Ynigues, told the committee he trusted his mortgage broker, a longtime music student of his. "I asked for a 30-year fixed," said Ynigues, "but as I was signing the papers I found out I could not get a fixed. The broker told me not to worry, that the rates could go lower." Ynigues has seen his payment go from less than $2,100 to more than $2,300 already, and he's afraid it will go higher yet.

These borrowers are far from alone. Janis Bowdler, a policy analyst with the National Council of La Raza, says the mortgage market is not working well for minorities. In the Latino population; foreclosure rates are at a record high.

Bowdler said that many families are steered to inappropriate subprime products.

Senator Robert Menendez, Democrat from New Jersey, reported that 52 percent of African Americans receive subprimes and 47 percent of Latinos do as well. Many, however, could qualify for a prime rate loan.

This kind of steering is not only pervasive, it's deliberate, according to testimony from consumer rights attorney Irv Ackelsberg. "This fraud infested market has been producing little social benefit," he says. "Mortgage origination practices are run over by greed."

The lending industry members asserted that subprime loans have enabled many Americans to become homeowners; without them, first time buyers would not have had access to credit.

But Ackelsberg listed that as one of the myths about subprime borrowing.

Actually only 11 percent of subprimes are made to first time buyers, he says. The majority are homeowners convinced to refinance into inappropriate loans.

The second myth is that subprimes are good credit repair products. The pitch here is that by paying a subprime for a while, borrowers will increase their credit scores and soon transfer into a prime loan. Ackelsberg says there is scant evidence that this happens very often.

According to him, the entire subprime meltdown should come as no surprise to anyone. Subprime mortgage lending was the modern equivalent of a gold rush with home equity the gold. Furthermore, even though foreclosure stats are spiking, they represent subprime loans that have mostly not yet reset.

He guesses that as many as five million foreclosures may occur over the next several years, basically saying, if you think it's bad now, wait until all those ARMs reset.

It's going to be a bumpy ride.

The committee raked regulators over the coals.

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