Plan Freezes 'Teaser' Rates of Subprime Loans

ROBERT SIEGEL, host:

We want to know what Democrats make of the president's plan. And joining us is Representative Brad Miller of North Carolina, who's been pushing for reform in mortgage markets.

Welcome to the program, Representative Miller.

Representative BRAD MILLER (Democrat, North Carolina): Thank you. I'm glad to be here.

SIEGEL: From what you've heard about the administration's plans, are enough people covered by what the White House proposed today?

Rep. MILLER: The short answer is no. I understand from the New York Times this morning they would only reach about 12 percent of the folks whose mortgage payments are resetting. And the average reset is about 30 to 50 percent, so it's not too surprising that a great many of those folks are not going to make the new monthly payment.

SIEGEL: On the other hand, you could make the pool of people assisted larger by saying it should not exclude those who can afford the reset. Why should there be any help for people who actually could afford to pay the loan that they took at?

Rep. MILLER: Well, I think the fact that it's excluded points out that the purpose of this plan is not to help borrowers who were in bad loans, even predatory loans. It is to help the lenders. It is to help the investors who now owned those mortgages.

SIEGEL: Let me put to you - this is not a hypothetical. This is a colleague of mine who is talking to me. What about somebody who doesn't own a home and who, in fact, looked house prices in 2005, first half of 2006, said I can't afford that. I'd have to take a horrible loan with some low teaser rate that would then come back to bite me a year later or three years later, so I'm not going to buy. I'll just keep on renting. Why should that person have the benefit now of lower real estate prices because he was prudent back then?

Rep. MILLER: He will have the benefit of a low real estate. He'll have the benefit of not being in a predatory loan. But all of the studies show that the vast majority of people don't really know what they're signing. They don't know they have a prepayment penalty. They think that they're getting good information from the retail level of the market, the person that they're coming in contact with, sort of explaining things to them. And they're really not.

SIEGEL: A bill that you've sponsored to crack down on predatory lending - and it's passed the House - would, among other things, set a federal standard to ensure that borrowers can repay their loans. Is it still true that the majority of people who receive subprime mortgages have managed to become homeowners or remain homeowners even though they might not pass such a test?

Rep. MILLER: It's true that most of the mortgages that will be taken out will not end in foreclosure, but a substantial number will. It is not true that the subprime market is really about homeownership. That is the first offense that you hear from industries that all of these loans, all these exotic or - their term is innovative mortgage products, were designed to help people get into homeownership.

Actually, 10 percent - one subprime mortgage in 10 is to purchase a furnished home, 72 percent are refinanced. It is really people who need to borrow money because they're having one of life's rainy days. And actually the financial circumstances of the middle class are pretty tough, and they need to borrow money frequently. And often, the only place they can borrow it from is by borrowing it against their house. And if they come and contact with the wrong person, they may end up losing their home, and with their home, they lose their membership in the middle class.

Rep. MILLER: What about the idea of just not doing anything at all and saying people should face the consequences of the decisions that they made, the documents they didn't read, the questions they didn't ask of the shifting person who sold them the mortgage?

Rep. MILLER: I'm certainly worried about the moral hazard with respect to industry. I don't want to bail them out. I am not terribly worried about the moral hazard at the retail level because I think borrowers did not know what they're getting into. They went to someone from whom they thought they could get honest advice that would be in their interest and they could make an important decision based upon that advice, and their confidence, their trust was betrayed.

But as to industry, as to the lenders, as to the investors that now hold the mortgages, I'm pretty content to let them stew with their own juices.

SIEGEL: Representative Miller, thank you very much for talking with us today.

Rep. MILLER: Thank you very much.

SIEGEL: That's Democratic Congressman Brad Miller of North Carolina, sponsor of a bill in the House to crack down on predatory lending.

MELISSA BLOCK, host: One final note on the president's plan to help mortgage holders: When he announced it, he urged borrowers in trouble to use a new hotline.

President GEORGE W. BUSH: The best you can do for your family is to call 1-800-995-HOPE. That is 1-800-995-H-O-P-E.

BLOCK: Well, this afternoon, the White House had to put out a correction, saying the number is really 1-888-995-HOPE, not 1-800. It turns out the wrong number belongs to Karen and Ron Pulaski(ph) and their Freedom Christian Academy based in Ponder, Texas. We tried to get word with the Pulaski's to get their reaction but their voicemail was full. Transcript provided by NPR, Copyright National Public Radio.