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Predatory Lenders Turn American Dream of Owning a Home into a Nightmare for Those With Credit Problems. High-Interest Loans Put Them in Holes That Often Get Deeper.
Their mortgage application was supposed to be locked in at 8 percent.Then it was 10 percent.
At closing, "Ken" and his wife were told the rate was 14.49 percent.
Take it or leave it.
Now Ken is in Chapter 13 bankruptcy. He and his wife pay $478 a month, on top of an 11 percent mortgage of nearly $1,100 a month - not including taxes - to catch up on their arrearages.
Bankruptcy was a last resort to keep the mortgage company from taking the house in foreclosure.
Their lender was also a predator.
In many ways, Ken and his wife are the prototypical victims of a predatory loan.
They both have jobs. Ken holds a respected position. They make around the median income for Lancaster County, which is just shy of $50,000.
But they'd had some credit card debt. They were "subprime" borrowers - those with less than pristine credit.
And it's in the subprime market that predatory lending is exploding, with devastating consequences.
Foreclosures and sheriff sales in Lancaster County have skyrocketed in the last six years. Research by government agencies and nonprofit groups blames a significant share of the problem on predatory lending.
Predatory loans are mortgages, refinance deals or home equity loans that take advantage of subprime borrowers by charging excessive interest or fees, hiding "balloon" payments or prepayment penalties in the fine print or basing loans not on the ability to pay but on the equity in someone's home, among other scams.
In their wake, predatory lenders, drawn into a red-hot real estate market with the help of changes in federal laws and public policy over the last two decades, leave families locked into mortgages they can't afford. One misstep, and the borrowers can fall behind so far that the only options are foreclosure or bankruptcy.
Their homes, for most Americans the primary source of savings, may be mortgaged so deeply that the owners can't afford to sell.
Predatory loans are often seen as mostly affecting lower-income first-time home buyers in urban neighborhoods.
Yet housing counselors in Lancaster County warn that the biggest threat is actually from predatory refinancing and home equity loans, which are prevalent countywide, and that the consequences of the "refi" craze might not be felt for years to come.
The rise in foreclosures has finally attracted government notice. A long-awaited state Banking Department report on foreclosures and predatory lending has made a number of recommendations for legislative action (see related story, A8).
New laws, though, are coming far too late for people like Ken.
"I don't really have a lot of sympathy for subprime lenders who play these games," said Ken's attorney, Mitchell Sommers of Ephrata.
"There's too many middle-class people in Lancaster County and elsewhere who are face to face with the dark side of capitalism."
Rise of predators
A number of factors converged over the last 25 years to put predatory lending on the nation's radar screen.
First, laws changed. Mortgage interest rates were deregulated in 1980.
The banking department report on foreclosures points out that the 1986 tax reform law contributed by outlawing deduction of credit card and car loan interest - while interest on home equity loans, traditionally used for home improvements, remained deductible.
That led homeowners to start buying a lot more than bricks and mortar with equity loans. And lenders developed products to serve the market.
In the '90s, public policy began to emphasize home ownership as a societal goal, and more emphasis was put on ending discrimination in lending.
The "subprime" business began to grow, offering loans to people whose credit wasn't good enough to qualify for market-rate loans.
Then, in the last five years, as interest rates bottomed out, the real estate and refinance markets took off.
"In a market expansion, with rates at historical lows," said Craig Roda, president of Fulton Mortgage Co. and president of the board of Lancaster Housing Opportunities Partnership, "... there are people who are unscrupulous who will prey on individuals who have financial difficulties."
What distinguishes a predatory loan from other subprime loans is that the predator is charging far more than the borrower should have to pay, often through deceptive sales tactics (see related story, A8.).
"I realize there's a legitimate place for subprime lending," Sommers said. "There's legitimate - and then there's intentionally taking advantage."
Predatory lenders hide deceptive tactics in the fine print, which most people don't bother to read even if they can understand it, or they wait until buyers get to the settlement table before changing the terms of the deal.
Patrick Cicero, an attorney for Mid-Penn Legal Services, said one common characteristic of predatory loans is that they are based on the equity in a house rather than on whether the borrower can afford the payments.
If the homeowner gets into trouble, the mortgage broker, which connected the borrower with a mortgage company, already has its money in hand. The mortgage originator has already sold the loan on the secondary market.
The foreclosure becomes someone else's problem.
In a trend that researchers blame partly on predatory lending, foreclosures in Lancaster County and throughout the state and nation have soared.
From 634 foreclosures filed in 1998 here, the number spiked at 992 in 2003 before leveling off at 880 last year. That's an increase of nearly 39 percent, at a time when countywide population grew just 6.2 percent.
A related trend involves sheriff sales of foreclosed properties. In 1998, the county sheriff sold 320 properties. Last year it was 477, a 49 percent increase.
Although subprime loans were only 5.6 percent of the mortgages in Lancaster County in 2002, a study by the South Central Assembly for Effective Governance found, subprime originators accounted for 28.6 percent of all foreclosures.
Predatory lenders have a disproportionate effect on elderly and minority homeowners. The South Central Assembly's report, available at www.southcentralassembly.com, says African Americans in Lancaster County are 4.4 times more likely than whites to get a subprime loan, while Latinos were 3.3 times more likely.
But W. Craig Zumbrun, the executive director of the eight-county nonprofit group, said predatory lending isn't just somebody else's problem.
"It absolutely is across the board," he said, "every municipality, every age group and every income range."
Baiting and switching
Ken's eyes are red. Talking about being on the verge of losing your home isn't easy.
He and his wife had cut up their credit cards some five years ago and were trying to repair their rating. One mortgage company offered them an 8 percent loan, at a time when market rates were 5 to 6 percent.
Then Ken got a call from the loan officer. The mortgage company was being bought out. During the "blackout" period, the firm couldn't make loans.
The officer referred Ken to "a friend" at another mortgage company, which also offered 8 percent.
Before settlement, Ken got another phone call. Eight percent wasn't doable. Ten percent.
Reluctantly, Ken agreed.
At closing, all the parties were at the table when the mortgage representatives left the room. When they returned, they announced another problem had cropped up.
Now the rate was 14.49 percent.
Gladys Delgado of Tabor Community Services calls Ken's case a classic example of predatory lending.
Helping the victims, though, isn't always easy.
"Pennsylvania as a state is a ripe target for predatory lending," said Zumbrun.
"Our consumer protection laws and bankruptcy laws are not as good as New Jersey's or the Carolinas' or Georgia's," and the state has a "relatively archaic" system of regulating parties involved in mortgage deals, like loan solicitors, mortgage brokers, settlement firms and real estate agents and appraisers.
That opens opportunities for collusion.
The county Human Relations Commission's fair housing program investigates predatory lending if it involves discrimination against someone in a legally protected class - for instance, race or nationality - but the cases are hard to prove.
Willonda McCloud, the county's senior fair housing specialist, said victims may collect actual damages, punitive damages and civil penalties ranging from $11,000 for a first offense to $55,000 for repeat violators.
Zumbrun pointed out that in a case in York County involving a 200- home development sold partly with predatory loans, the federal government settled a lawsuit for a small fine - "probably less than they made in profit on one house. They're back in business."
Tabor recently started a program through Fannie Mae, the giant mortgage repurchaser, to connect homeowners facing foreclosure because of predatory loans with banks willing to refinance on better terms.
But borrowers often wait too long to ask for help.
"They come when it's too late," after they've already gotten formal notice of foreclosure proceedings, said Mike Weaver, executive director of Tabor, which counsels 225 families a year on foreclosures.
"It's human nature. ... People can make a bad decision on a loan or a bad financial decision. It's really hard to stand up and say, 'Boy, I really blew it.' "
Human face of problem
Nearly every housing counselor contacted for this story has horror stories to tell about predatory lending.
McCloud is investigating a case in which a woman who speaks no English had a "balloon" payment written into her home equity line of credit.
Even if the borrower had paid her monthly $375 for 15 years of the loan's lifetime, "she would have never paid off the balance," McCloud said. "And that wasn't disclosed anywhere."
Delgado handled one case in which a homeowner in foreclosure found a buyer for the house, but the mortgage company wouldn't OK the sale.
The house went to sheriff sale. An attorney for the mortgage company bought the house for the fees and sold it for more money than the previous owner owed on the mortgage.
One Lancaster professional with some credit problems went to closing with a subprime lender expecting to pay about $2,500 in closing costs on a $100,000 house. He and his wife found out they had to fork over $5,400.
In the South Central Assembly's 2003 report, three of four case studies involved Lancaster County homeowners, none of them in the city.
A husband and wife in Denver - he works construction; she is a day-care provider - agreed in 2001 to a subprime loan to consolidate debts. The lender put two mortgages against their house, one at 11 percent and the other at 20 percent.
Fees and credit insurance on the first mortgage of nearly $108,000 were almost $18,000.
The lender later refinanced at 10.3 percent, tacking on another $6,600 in fees. A prepayment penalty of about $6,500 means the "Browns" have no equity in their home and can't refinance with a legitimate lender.
Refinance risks
Then there's Ken.
"We struggled through the mortgage for a few years," Ken said. But at $1,475 a month, it didn't take much for the family to fall behind.
Ken took a refinance offer from another local mortgage broker. The broker wound up under investigation for fraud, he said. The refinance never happened. Ken's mortgage company filed foreclosure.
Then the company offered a new deal. Eleven percent interest.
The $25,000-plus in back payments, lawyer fees and late fees? Rolled up into the new loan.
A house that Ken had bought four years earlier for $119,500 now had a mortgage of $129,000.
And it's not unusual for borrowers to find themselves owing more than their houses are worth.
Housing counselors are seeing an increasing share of predatory loans coming from refinancing and home equity loans.
Researchers say homeowners nationwide "cashed out" $333 billion worth of equity from 2001 to 2003, at the height of the refinancing boom.
Predatory lenders often engage in what Mid-Penn attorney Cicero called "equity stripping" - lending more than the borrower can afford to pay, or boosting the principal of a loan by tacking on high fees and balances from previous loans, eating away equity in the process.
Even some legitimate institutions are offering to lend 100 percent of a borrower's equity. Housing counselors see cases involving loans up to 125 percent of the equity in a house.
If a homeowner owes more than the house is worth, he or she loses the option to sell the home to get out from under the debts.
If a borrower falls behind, a predatory lender may offer another refinancing deal at a slightly lower interest rate. But the new principal is higher because the lender has added in more fees and any arrearages.
"People are losing their houses," Delgado said, "simply because they can't afford to sell."
Older people are often targeted in refinance and equity loan scams. Contractors may collude with lenders, soliciting home repair work from senior citizens and offering to connect them with the lender to pay for the job.
The lender then strips equity from the home, while the homeowners, who have fixed incomes, are stuck with loan payments they can't afford. The next step is foreclosure.
"I have elderly people that I don't know how they got a mortgage," Delgado said. "Seventy years old, with a 30-year mortgage? ... Most are paying 75 and 80 percent of their income (for the loan). How is that approved?"
By paying bills with equity loans, homeowners are putting their houses on the line, Lancaster attorney Greg Armstrong pointed out.
"What we find you're doing is taking unsecured debt and securing it with the house, and jeopardizing the house," he said.
The last option
Last year, Ken found a legitimate mortgage company willing to give him an 8 percent refinance. But his mortgage holder kept stalling.
Finally the company demanded a $22,000 "prepayment penalty," killing the deal.
Ken turned to attorney Sommers. They filed for Chapter 13 bankruptcy, giving Ken five years to repay his mortgage debts.
Sommers is also planning to file a complaint with the bankruptcy court, charging that the prepayment penalty wasn't spelled out in the loan terms.
For victims of predatory lending, bankruptcy can be the only way to stave off foreclosure. Yet it's not easy.
Armstrong said nearly all of his Chapter 13 filings - in which the debtor sets up a repayment plan - involve foreclosures. Attorney Sommers said a high percentage of his "13s" do too.
The repayment plan, like Ken's, can be nearly unaffordable. If the borrower falls behind, the bankruptcy can be terminated and foreclosure proceedings restarted.
"That's five years of their lives walking on eggshells," Delgado said.
Sommers said sometimes it would be better for debtors to file for Chapter 7 bankruptcy, or liquidation, and walk away from the house and the mortgage. But rarely will people agree to that.
"The problem is that people have a really emotional investment in their house," he said.
"... It costs them stress on their families. You can't afford for anything to go wrong."
Ken agreed: "The strain at home is unbearable."
Housing counselors and lawyers wonder whether more is to come.
Weaver, the Tabor executive director, said the recent wave of refinancing and equity loans may "head off the problems for another decade or so," but eventually the impact will hit.
"It reminds me of Tony Soprano," Sommers said.
"Now the loan sharks give you a better interest rate," Ken said with a half-smile.
"They just break your legs," Sommers concluded.
"They don't take your house."
QUITE SIMPLY: PREDATORS STALK THOSE IN NEED!!
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