In Danger of Foreclosure? Beware of Predatory Lenders
Some Who Offer Help May Be Hoping to Cash In on Your Misery
Millions of American homeowners are at risk of losing their homes to foreclosure because they signed up for adjustable rate mortgages they can no longer afford.
If you are one of them, it may be possible to refinance to save your home. But you should know predatory lenders are waiting to pounce on you in your hour of desperation. Sounds melodramatic, but it's true.
If buying a home is the American dream, then predatory lending is the American nightmare. Predatory lending typically occurs in refinancing deals. Unscrupulous lenders cause people to lose their homes and neighborhoods to lose their luster. Aggressive mortgage brokers target the poor, the elderly, minorities and women, but it can happen to anyone.
Charles K. is a combat veteran who lives on a fixed income. He was a month or two behind on his mortgage, so he wanted to refinance in hopes of arranging a lower monthly payment. The mortgage broker promised Charles he could lower his payment from $980 a month to $880. The broker advised Charles to stop making payments to his old mortgage company, because his new loan would be ready soon.
But then the broker waited more than a month to schedule Charles' closing. At that closing, Charles learned his new monthly payment was $1,250 — hundreds more than the old payment he had been struggling to make. By now, Charles' old mortgage company was threatening to foreclose on his home, so he felt trapped and he signed for the new loan.
When I investigated Charles' case, I learned his monthly payment was jacked up illegally. By law, the broker was supposed to inform him the price was going up. The reason the monthly payment was so high is that the brokerage firm charged an unconscionable $13,000 to process the loan — pure profit for the broker. This abusive fee was then rolled into Charles' loan, so he ended up owing $146,000 on a house that was only worth $126,000.
Charles couldn't afford his new monthly payments. Eventually, he declared bankruptcy and the bank sold his home on the courthouse steps. He'd been trying to avoid foreclosure, but that's exactly what he got.
Some predatory lenders purposely structure their loans so the monthly payments are too high for the borrower. When the borrower defaults, the lender offers yet another loan with additional closing costs and fees. This is called "flipping."
Consumer advocates have documented cases in which homeowners were "flipped" into more than 10 different loans in just four years. One homeowner just wanted to borrow $26,000 but ended up paying $29,000 in closing costs and fees!
1. Predatory lenders often promise one set of terms when they talk to you, then jack up the price at closing. It's a sign that you're in for a rough ride.
2. If a mortgage broker asks you to sign a blank application form, that's a red flag. The broker may intend to falsify your credit history so you'll qualify for a loan you can't afford.
3. Adding co-signers is another ploy. Unscrupulous brokers may ask you to come up with a co-signer, knowing full well that person doesn't really intend to contribute to the payments. It's another way of getting you an expensive loan that the broker will make a lot of money on.
4. If a lender refuses to give you a copy of the good-faith estimate, that's a signal that the estimate will change. The lender doesn't want you to have written proof of the terms you were first offered.
5. Predatory lenders often structure loans with balloon payments at the end. The monthly payment seems manageable, but in a few years' time you could owe tens of thousands of dollars all at once. Of course, the broker is hoping you won't be able to afford the balloon payment and you'll refinance again, generating more fees for the firm.
6. If you see " credit life insurance" as a line item in your loan, beware! This kind of insurance is supposed to pay off your loans if you die. It's a rip-off. A basic life insurance policy is all you need. Plus, predatory lenders charge exorbitant premiums for products like credit life, credit disability and involuntary unemployment insurance.
7. Same goes for homeowner's insurance. Predatory lenders have been known to add expensive homeowner's insurance to a loan even though the homeowner already has insurance through an outside company.
8. Some predatory lenders continue to abuse you after you've gotten your loan by tacking on expenses to your monthly payments. They may charge for providing an escrow account for your property taxes, even though you are paying them directly yourself. They may charge late fees even when your payments are on time. If you try to refinance with another lender they may refuse to provide you with an accurate payoff statement.
Do Your Homework
1. Be the hunter, not the hunted. Don't borrow money from a company that slips a flier under your door or blares at you in a TV commercial. Find your own mortgage company. Check with the company that currently holds your mortgage if you want to refinance. Go to the bank where you have your checking account. Ask friends and neighbors if they've had a good experience.
2. Once you narrow down your list, check out the mortgage brokers or lenders by contacting the BBB and your county and state consumer protection agencies.
3. When a mortgage broker or lender gives you an estimate, get it in writing and make sure you have your own copy.
4. Never sign any paperwork that contains blanks.
5. Never follow advice to stop paying on your old mortgage loan. This could affect your credit record and trap you into accepting a predatory loan.
6. Demand a copy of your closing paperwork a couple days before the closing. Review it to see if the terms are different from what you were initially offered.
7. When you refinance with a different lender, you have the right to back out of the loan within three days of your closing. If you detect problems at your closing, immediately ask a real estate attorney for an opinion, so you can take advantage of that window.
How to Complain
If yours is an FHA loan, complain to HUD, the Department of Housing and Urban Development. If you've got a veteran's loan, complain to the VA. Contact your county and state consumer protection offices too. If they can't help you, they'll give you a referral. Your city or county office of fair housing may also be able to help. Also complain to the BBB so other consumers will have a paper trail to follow.
Foreclosure remedies must include lenders
We sort of understand how the national subprime lending mess and mortgage foreclosures have affected Wall Street and investors. Though it's not a pretty picture, it's all fairly clear-cut.
But beyond Wall Street, down on some Chicago streets, how to solve this problem and stop swaths of city blocks from tanking is anything but clear-cut.
Case in point: Last October, the Chicago-based Metropolitan Family Services agency hosted a community forum in the Roseland neighborhood to talk about education, HIV awareness and community policing.
But the meeting took a turn with residents wanting to talk instead about predatory lending and the new state law, the Illinois Predatory Lending Database Pilot Program.
The law, also known as HB4050, required borrowers with credit problems to get counseling if they were seeking non-traditional loans for properties in ZIP codes where foreclosures were skyrocketing. The ZIP codes were in neighborhoods such as Roseland, Auburn Gresham, Back of the Yards and West Englewood.
It turns out that most of the borrowers subject to this law would have been African American or Hispanic, since many of the distressed communities were black or Hispanic.
Because the state did such a poor job of informing residents about the law--intended to help stop the flood of foreclosures--ministers, mortgage brokers and others in the affected areas were able to conjure old ghosts.
They warned residents that upstanding mortgage brokers would pull out of the pilot communities. They warned that the law was racist. This stung residents with clear memories of the legacy of redlining in their neighborhoods.
To illustrate just how complicated this issue was, even some staffers in Metropolitan Family Services' Roseland office believed the law to be racist, even though the agency supported it.
So residents got scared. Then the state, hearing cries of discrimination, got scared and suspended the pilot program in January. Now the governor is attempting to lift the suspension.
Under the new and improved program, announced last week, the counseling criteria would be based on whether a borrower was seeking a non-traditional loan rather than on his or her credit score or the property's location. The rules also would expand the program to all of Cook County, making it harder for critics to cry racism.
The state now is in a 45-day public comment period, which began Wednesday. Those who want to voice concerns can write to Craig Cellini, Rules Administrator, IDFPR, 320 W. Washington St., Springfield, IL 62786.
After the comment period, there will be another 45-day review period. Enough already. Some estimates suggest foreclosure rates in some of the pilot ZIP codes average seven times the national rate.
According to the Woodstock Institute, a Chicago non-profit that studies housing, high-cost loans, a leading culprit of foreclosures, made up 57 percent of the loans in the pilot ZIP codes in 2005. By comparison, in Cook County the percentage was 32 percent. The 2006 numbers are being tallied and are expected to be even higher.
By broadening the program, the state just may be causing more trouble. The concern now is whether the infrastructure will be in place to implement so many counseling sessions and whether borrowers who really don't need counseling will be forced into it.
Though it may be a logistical nightmare, helping borrowers become better informed isn't a bad thing. But the more efficient approach to fixing this mess is to better regulate the mess makers: the slipshod lenders. At the very least, the titleholders should be forced to maintain upkeep on these foreclosed properties.
Last week, Sen. Barack Obama (D.-Ill.) called for a "homeownership preservation summit."
Here's a brighter idea: The Woodstock Institute and other housing groups are trying to pursue federal legislation that would force the lender to make sure a loan is suitable to a borrower's circumstances. We see what happens when it's not.
You may cringe at the thought of more government regulation. But consider the cost to local governments (read: taxpayers) that have to intervene after foreclosures. Next to drug dealing, few things suck the lifeblood out of a neighborhood like these boarded-up houses.
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