Let's fix this subprime mess

By Liz Pulliam Weston

For those of you who still believe you're not your brother's keeper, allow me to present the subprime mortgage mess.

When foreclosures started to spike last year, many people blamed the borrowers. "It's their own damned fault," went the reasoning. Those losing their homes were either too stupid or too greedy, said some, to recognize they couldn't afford the mortgages they'd been given.

Most of those affected had troubled credit histories and were sold mortgages with payments that adjusted sharply higher after an initial "teaser" rate expired.

But the trouble has long since spilled over. The subprime implosion triggered a widespread credit crisis, as nervous lenders tightened standards for even the best, most creditworthy borrowers. That in turn has made matters worse for the housing industry, contributing to flattening or falling home prices in many markets -- including, perhaps, yours -- as well as widespread layoffs in construction and mortgage lending.

• Talk back: How has the subprime crisis affected you and your area?

The ripples are starting to spread throughout the economy, and the fallout may be severe enough to tip the whole country into recession.

So, to put it simply, your home's value has probably already been affected. Your job may be next.

A visit to the 'art department'

The more you learn about the Wild West atmosphere of mortgage lending in the past few years, the less you'll be comfortable with the idea that the borrowers brought it all on themselves.

Let's take a few of the allegations facing Ameriquest, the now-defunct company that along with its sister company Argent was once the nation's largest subprime lender. According to investigations by the Los Angeles Times and National Public Radio's "Morning Edition," former employees claimed that:

• Tax forms and other documents were routinely altered, a practice known as "taking the loan to the art department."

• On occasion, documents for a fixed-rate loan would be placed atop a contract for a riskier adjustable-rate loan. After the borrower signed all the documents at closing, the fixed-rate pages would be discarded and the borrower would be shackled to the more hazardous loan.

• Mortgages were larded with hidden fees and borrowers were misled about loan terms, including whether rates were fixed and for how long and whether they would face prepayment penalties if they tried to refinance.

Before it was shut down, Ameriquest either denied the allegations or insisted that it had altered its practices to prevent abuse. It agreed to pay $325 million last year to settle predatory lending charges in 49 states and the District of Columbia.

• Video: Is the worst yet to come?

I might derive some comfort if I could proclaim Ameriquest the only offender, or even the worst. But I've covered subprime mortgage lending since the mid-1990s, including a stint as a business reporter in Orange County, Calif., which was ground zero for the subprime business.

Continued: A 'Boiler Room' environment

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