The way many high-risk, non-traditional mortgages work is that you pay a low rate for a number of years — which is probably why you took the mortgage in the first place — then, once that time period is up, the rates skyrocketed. Then you are faced with this increasing rate.
Now, what many people didn’t know and what seems to me to be so perverse is that, when you first get that new notice that your rate has doubled — which is going to happen to a lot of people in New Hampshire in the next year, because of the mortgages they already have — a lot of people say, “Oh, my goodness, let’s try to start paying down the mortgage as fast as we can.” I mean, that’s kind of part of the American ethos, you know, pay down the mortgage, get out of debt. What people don’t realize is that if you try to pay your mortgage early while you still have the low rate, the lender slaps a huge prepayment penalty on you.
So lenders are actually discouraging people from being responsible and paying off their mortgages early, because they want to increase their profits. So it’s not surprising that loans with prepayment penalties have a 52 percent greater risk of default than those without.
(Defenders of prepayment penalties will argue that the commitment not to pay off the loan early is what permits the lender to offer the low rate in the first place. Critics counter that the penalties are a way of preventing borrowers from refinancing their mortgage at an even lower rate offered by a competitor. But expecting that level of detail in a campaign address, even from a Clinton, is probably unwise.)
Clinton’s proposals to fix the mess include eliminating prepayment penalties, tightening regulatory supervision of mortgage brokers, expanding federal government support for homeowners facing foreclosure, and boosting funding for affordable housing.
The mortgage lending industry is already screaming. But it’ll get little sympathy from anyone who has paid attention to how gloriously it’s mucked up its own business. Sure, Clinton’s proposals embody a a classic Democratic approach, a big government solution that will cost money. But her speech was also a pragmatic reaction to what is actually happening in the U.S. economy right now. If I were a voter in New Hampshire, facing an option-ARM mortgage about to reset, I’d probably be taking Hillary Clinton pretty seriously right now.