Avoiding a Predatory Mortgage Lender

Over the past few years many consumers have been the target of the abusive practices by predatory lenders. Many here in Indiana have lost their homes due to foreclosure. Others have lost equity from their homes, and pay higher monthly mortgage payments than they should.

The following are some of the abusive lending practices that happen everyday.

Don't Pay Excessive Closing Costs
Most loan programs require that the borrow pay closing costs. Closing costs should range between $1500—$2500 depending if an origination point is charged. Most of these fees do not directly go to the lender but to third party professionals who help facilitate the transaction. Example: $275—$350 to the home appraiser, $45 to the pest inspector, $100—$125 to the surveyor, $500—$700 to the title company. Already you have between $920—$1220 in third party fees. The lender will usually charge an underwriting fee $250—$350, a documentation preparation fee $100—$150, a credit report fee $50, and a processing fee $150—$250. You can see how these fees add up.

Charging Higher Interest Rates Than A Borrower’s Credit Warrants
While the higher interest rates charged by sub-prime lenders are intended to compensate lenders for taking a greater credit risk, too many borrowers are unnecessarily paying higher interest rates. Borrowers with perfect credit are regularly charged interest rates 2 to 5 points higher than the market rates; with some sub-prime lenders, there simply is no lower rate, no matter how good the credit.

Many mortgage loan originators lack the experience to understand the Fannie Mae, Freddie Mac, or Federal Housing Administration loan guidelines. Therefore, they try to sell you a program that does not warrant your credit.

Falsifying Your Loan Application
Some predatory lenders will falsify your loan application in order to get you approved. There are many mortgage programs that can be easily manipulated by a mortgage originator. The most common is the use of a Stated Income Program. With a stated income program, your income is not verified. Basically the loan officer will STATE what he/she needs to get the loan approved. What may happen is that you will acquire more of a mortgage than what you can pay for. As a result, you may struggle to meet your monthly mortgage payments. For mortgage brokers, the motivation to engage in this kind of practice is a short-sighted desire for the fees generated by the loan. Loan officers at mortgage companies may have similar motivations based on earning commissions, regardless of the consequence to the lender for which they work.

Other ways your loan officer can hurt you is to omit payments that you have that do not appear on your credit report. Such items could include rent to own merchandise, buy-here-pay-here car payments, child support payments, etc. By not revealing these bills, you may again end up with a total monthly obligation that you cannot afford.

Loans Over 100% Loan-to-Value
Some lenders regularly make loans for considerably more than a borrower’s home is worth with the specific intent of maximizing their debt and thus their payments, and trapping them as customers for an extended period. Even borrowers with excellent credit have no way to escape from a high rate loan if they are ‘upside down’ and owe more than their home is worth. Borrowers are frequently unaware that they owe much more than their homes are worth, and even more frequently unaware of the consequences.

Single Premium Credit Insurance
Credit insurance is insurance linked to a specific debt or loan which will pay off that particular debt if the borrower loses the ability to pay either because of sickness (credit health insurance), death (credit life insurance), or losing their job (credit unemployment insurance). It is rarely promoted in the ‘A’ lending world, but it has been aggressively and deceptively sold in ‘single premium’ form in connection with higher cost loans, and then financed into the home loans, costing borrowers equity in their homes, and forcing them to pay interest on the insurance premium for 30 years.

With ‘single premium’ policies, instead of making regular monthly, quarterly, or annual payments as people do with other insurance policies, the credit insurance is paid in one lump sum payment, which may be as high or even higher than $10,000, especially if borrowers are sold multiple forms of credit insurance, as is frequently the case. This premium is then financed into the loan, increasing the loan amount (and since the loan amount is higher, the lender’s origination fees also increase), and the borrower must then pay monthly interest on the amount of the insurance premium. While the coverage on a single premium policy usually lasts for only 5 years, the borrower pays for it, and pays interest on it, over the 30 years of the home loan. Typically, single premium credit insurance policies cost four to five times as much as monthly-paid credit insurance and over ten times as much as term life insurance policies, and of course the cost of these alternative products are not staked against the borrowers home. Finance and some Sub-prime companies will try to offer this type of insurance.

If you refinace down the road
When refinancing predatory lenders often finance huge fees into loans, stripping thousands of dollars in hard-earned equity and racking up additional interest in the future. Borrowers in predatory loans are routinely charged fees of just under 8% of the loan amount in fees, compared to the average 1%-2% assessed by banks or honest mortgage companies to originate loans. Once the paperwork is signed and the rescission period expires, there is no way to get that equity back, and borrowers frequently lose up to $10,000 or $15,000 from their home while receiving little, if any, benefit from the refinancing.

One of the Most Abused Practices: Property Flipping

The typical “property flip” begins with an investor purchasing a distressed property for as little as a couple of thousand dollars. After doing minimal cosmetic (paint, new carpet, etc.) or even no work to the property, the owner finds a buyer, frequently targeting low-income, minority families. The buyers have no agent representation of their own and no real estate knowledge, putting them at the mercy of the seller/owner. The Seller/owner appears heaven sent because they are willing to do anything to get you into their home. They will put you in with “no down payment” and they will pay for your closing costs. The seller/owner abuses this position by lying about the condition of the house, promising to make visibly-needed repairs, setting the sales price at far above the property’s actual value, and referring the buyer to a subprime lender or broker.

Many subprime lenders will only make a purchase loan if the loan is for 80% or less of the value of the property. In these instances, the property seller uses a number of schemes in order for it to appear that the buyer has the required down payment of 20% or more. The seller first sets the sales price far above what the property is actually worth, then the seller falsifies the buyer’s deposit and will often create a second mortgage, which exists on paper only. The key to the scam is having a lender or broker that will utilize appraisers who will support the property’s inflated sales price. In exchange for their participation, the lender or broker is compensated by the fees and additional charges on the loan, which are often excessive.

What often happens is that you get into the home and shortly down the road something happens (furnace goes out, extensive plumbing repairs, new roof, etc). Now you are trapped! You owe more than what the house is actually worth—and it is falling apart!