Study: Predatory Loans Hike Foreclosure Risk

Victims of predatory lending in the subprime mortgage market face up to a 50% greater risk of undergoing foreclosure because of prepayment penalties and balloon payments, according to a new University of North Carolina study.The study, reported by the Center for Community Capitalism at UNC Chapel Hill, indicates that subprime loans grew more than ninefold, from $35 billion to $332 billion, from 1994 to 2003. In the fourth quarter of 2003, 2.13% of subprime loans nationwide entered foreclosure, more than 10 times higher than the rate for prime loans. During a teleconference, Michael Stegman, director of the center, said 20.7% of all first-lien subprime refinance loans originated in 1999 had entered foreclosure by December 2003. Mr. Stegman said he hopes the study will encourage state and federal lawmakers to consider legislation that would ban prepayment penalties and balloon payments. The study shows that a prepayment penalty is costly when applied unfairly and offers no interest rate benefit, said Keith Ernst, senior policy counsel at the Center for Responsible Lending, which financed the study. "All prepayment penalties and balloon payments in the subprime market are predatory," Mr. Ernst said. "The study shows they are harmful to borrowers."