More often than not, when a conversation begins about the housing market and whom is to blame, many take issue with the homeowner. Politicians, talk radio and even neighbors who purchased their home with a conventional mortgage will say something like ” they (homeowner) bought a house that they couldn’t afford”. However, this logic completely ignores the root of the problem. Daniel Edelman and Cathleen Combs identify 11 basic types of predatory lending which are listed below. Remember, these type of mortgages are unlawful and actionable.
1. Deceptive solicitation: Predatory lenders forge borrower’s signatures, alter loan documents, coerce elderly homeowners and falsify or alter applications for making unaffordable loans. Other subtle types of deceptive solicitation may include, touting reduced monthly payments as compared with an existing loan without disclosing maerial facts such as 1) homeowners’ taxes included in the payments on the existing loan but NOT in the payments of the proposed loan; 2) and of course “teaser” rates on adjustable rate mortgages.
2. Home Improvement abuses: A considerable amount of mortgages result form telephone or door to door solicitation by purported home improvement contractors. Such solicitators are really brokers that arrange financing either by having the homeowner execute a retail installment or taking a security interest on their home (i.e second mortgage).
3. Questionable mortgage/broker practices: Some lenders pay mortgage brokers to induce the to sign up borrowers at a higher interest rate than necessary. These payments areknown as “yield spread premiums”. These practices are in the process of being abolished by federal regulation but these loans exists on millions of homes today.
4. Unnecessary high rates: Not everyone who recieved a subprime mortgage did so because they did not qualify for a prime loan. In fact, a significant percentage of homeowenrs recieved subprime mortgage loans even though they qualified for prime loans.
5. Excessive points and fees:
6. Loan flipping: Loan flipping requires the borrower to refinance low rate mortgages (for home improvements, etc) but will refinance the blalance to a 10-13% loan.
7. Bogus and junk fee charges: Examples are $75 for transporting documentation, $100 for wire transferes, warehouse fees, processing fees and review fees and the list goes on.
8. Prepayment penalties:Regulation Z provides that prepayment penalties are restricted on HOEPA loans and for Higher Priced Mortgage loans. For both HOEPA and higher priced loans, the maximum duration of the prepayment penalty is two years after consummation. 12 CFR 226.23(d)(7)(i).
9. Balloon payments and call provisions: A common predatory lending practice is structuring loans so that the borrowers stillowes most of the amount borrowed at the end of the loan. The homeowners is not able to pay the balloon payment at the end of the loan and either loses the home after years of making high interest payments or is forced to refinance. Some of these loans are also structured to be accelerated at the sole discretion of the lender.
10. Negative amortization: The borrower owes more at the end of the loan than at the beginning othe loan because the loan payments are insufficient to cover the interest.
11. Forced Placed Insurance.