Predatory Lending: Are You A Victim?
By Arnold Mann, Mortgage Funding USA
All the talk from the Federal and State levels about Predatory Lending has me scratching my head. How do you know if you are or have been a victim of Predatory Lending? Predatory Lending is not easy to define. It's like a bad smell, you'll know it when you smell it. Predatory Lending takes all shapes and forms and occurs at all levels. It has had an impact on rich and poor, educated, and the young and old.
In its most basic form, Predatory Lending occurs when you are looking to refinance your home with another mortgage company. Predatory Lending takes something away from you that you had before; such as a great mortgage rate, equity in your home, or a longer loan term and replaces it with something that puts you, the homeowner, in a worse position than when you started the refinance process. It may result in a higher rate, no home equity, a shorter loan term, and higher payments. Most people never know they became a victim of Predatory Lending because the exact definition is so elusive and there are so many ways to become a victim. The following examples are early warning signs of Predatory Lending. Remember, not every mortgage loan refinance that falls into these categories is Predatory; there could be legitimate financial reasons for doing the mortgage refinance, however beware!
Part two of Predatory Lending will discuss what you can do to protect yourself from Predatory Lending. Until then stay informed, ask questions, know your own situation, and take your time-this is one of the most important financial decisions of your life.
- Bait & Switch - This is the number one tactic used by Predatory Lenders. On the initial application they promise you a low interest rate and assure you that your property will appraise at whatever value is necessary to meet the needs of your particular financial situation. They may even put it all in writing on the Good Faith Estimate (GFE). As you draw closer to closing on your loan you receive a call advising you that a problem has come up. They can still do the loan but the rate is going up or they need to raise the loan to value (LTV) in order to give you the cash out you required. Finally, you are at the closing table and the numbers they gave you on the Good Faith Estimate do not match up with the numbers on the HUD Settlement Statement. The interest rate has risen, other loan terms have changed, and their fees have gone up. STOP! Walk away or sign and remember that on a refinance you have 3 business days to RESCIND the loan. This requires that you sign the Right to Cancel (Rescind) paperwork and fax it back to the Lender and the Closing Agent that closed your loan and call the loan professional and his manager. Full details of rescinding your loan are always included in your loan closing package.
- Interest Rate & Payment are higher than your current rate and payment. This is a warning sign and one you must pay attention to. Remember what you were initially trying to accomplish. If you are consolidating your credit card debts and other bills and the total sum of these payments plus your house payment is not less than your total bill payments plus your house payment, then you need to stop. What have you accomplished? If you are not saving substantial dollars there is no benefit to refinancing. Likewise, if you are receiving cash out from the refinancing and the rate is higher, you may have been better off just obtaining a 2nd mortgage or home equity loan rather than refinancing a 1st mortgage.
- Shorter Loan Term. Many mortgage professionals (Predatory Lenders) will tell you that by refinancing your mortgage with a shorter term, (i.e., a 30 year fixed rate loan to a 15 year fixed rate loan) will save you money. Obviously, with a shorter rate term the payments will go up and in today's rate environment (mortgage rates rising) your interest rate may also rise. Be suspicious when all you want to accomplish is to pay down the principal on your mortgage faster and the loan professional offers to refinance your loan. You can always send in extra money at any time to reduce your principal payment. All Lenders are happy to take your money to reduce the principal on your loan. So remember, you do not need to refinance if you want a shorter term of loan - you just need to make extra payments or send additional money with your monthly payment.
- Equity Stripping. Equity is the difference between the value of your home and the amount of mortgages on your home. If your home is worth $200,000 and you have a 1st mortgage of $100,000 plus a 2nd mortgage or home equity loan of $50,000, then you have equity in your home of $50,000 ($200,000 less $100,000 & $50,000). What the Predatory Lender does is strip you of the $50,000 equity in your home. He accomplishes this in several ways charging huge fees up front and/or placing more of a debt burden on you than you can really afford. Again, look at what you are going to be paying after your home is refinanced; can you really afford to make that payment along with any other payments? If not, you need to stop the process and reanalyze what you are trying to accomplish. Equity stripping puts you in a very vulnerable position. If they inflate the value of your property to obtain a greater loan amount, then you may not be able to later sell or refinance your home since your mortgage debt is higher than the home is actually worth. In the event of an emergency, you will have no equity in your home to borrow against.
- High Interest Rates. Higher rates generally mean more profit to the loan professional. In a rising rate environment higher rates are the norm, but are you paying a higher rate than you deserve? First, you need to know your credit worthiness. If you don't know your score go to: www.annualcreditreport.com/cra/index.jsp. This can be done for free. Generally, if you paid your mortgage on time as well as your other bills you will receive a favorable rate. If you have been late on your mortgage two or more times over the last 12 to 24 months your rate will be higher. The question is how high? If 30-year fixed rates are being advertised at 6.00% in your local newspaper or the internet www.bankrate.com you probably should not be paying more than 3% points higher than these rates (as a rule of thumb) or 9%. There are many other factors going into determining the rate but based upon today's rates anything over 9% -ASK QUESTIONS!