Questionable industry practices have taken top billing in the latest fight for minority, elderly and low- to middle-income homebuyers, and the government is trying to do something about it.
"Predatory lending comes into play where you have people with marginal incomes who can't get financing because there is a credit problem or there is an income problem, and the banks just won't give them financing," said James Crockett of James Crockett Realty Co. in Baltimore. "Then they have to seek secondary financing, or subprime financing, and that's where the predators come in."
Predatory loans result when a lender misleads or coerces a borrower into taking out a home loan (including a home equity loan or refinancing) at excessive costs and without regard to the homeowner's ability to repay the loan, according to FDIC Consumer News, a publication of the Federal Deposit Insurance Corp.
The elderly and middle-income consumers are most vulnerable, the FDIC warns, and the consequences often involve harassing collection tactics, schemes to refinance at higher rates or fees, or foreclosure on the property.
"There is money available for people to buy, but the requirements of the lenders and the discrimination of the lenders prevent them from being able to buy," Crockett said. "They use regulations to discriminate against buyers, and they just disqualify a person from buying a home. ... I'm talking about individuals who have jobs, they have money, but banks just won't finance them.
"You would think that a person with marginal income, who had mediocre credit, a lending institution would be amenable to making a loan to them at a reasonable rate to prevent a foreclosure," he said. "But it's just the opposite. They charge higher interest rates to that person, and then they acquire the property, and then they turn around and sell it ... and they make a profit."
A surge in homeownership has brought with it an increase in lending abuses. In response, the U.S. Department of Housing and Urban Development is stepping up measures to prohibit lenders from illegal activities that can cost borrowers their homes.
HUD's Credit Watch Termination Initiative is expected to affect more than 21,000 home offices and branches of FHA-approved lenders nationwide.
HUD established Credit Watch in 1999, originally focusing its efforts on lenders whose default and claim rates exceeded 300 percent of the average rates.
Barring lenders
This month, however, HUD began focusing on lenders whose rates are 275 percent of the local average. The default and claim rate for Maryland is 2.14 percent, and 4.66 percent for Baltimore.
The provisions of Credit Watch give HUD the authority to bar lenders from issuing FHA-insured mortgages if their default and claim rates on loans are 200 percent of the average rate for that area and if that rate exceeds the national default and claim rate. Defaults are loans reported as 90 days or more delinquent by the servicing lender. Claims are HUD/FHA loans that were terminated.
To date, through Credit Watch, HUD has terminated lending approval for 120 branches nationwide and placed 219 branches on warning status.
Even giant corporations have found themselves under scrutiny. Case in point: Citibank Corp. agreed last month to repay customers $215 million to settle charges that Associates First Capital Corp., a company it acquired, had manipulated borrowers into buying inflated mortgages and credit insurance.
In Baltimore, HUD terminated lending approval for the local branches of Bankers First Mortgage Co., Capitol Mortgage Bankers and Harbor Financial Mortgage - all for what the department deemed predatory or unscrupulous lending practices.
The state has adopted measures of its own. In June, Gov. Parris N. Glendening signed into law a bill to pre-empt Maryland's cities and counties from enacting their own predatory- lending legislation.
Although regarded as industry-friendly legislation, it includes provisions that lenders must follow when originating loans carrying an interest rate 7 percentage points higher than a Treasury security or comparable security.
As the Credit Watch program shifts into high gear, HUD expects more sanctions to follow, as well as greater safeguards to prevent consumers from falling prey to other illegal lending practices. Some wonder why it has taken so long.
Crockett has been in the real estate business for nearly 50 years. He borrows from his own experience when relating how, though times have changed, discriminatory and unfair trade practices remain.
He believes that it has become more difficult in recent years for minorities and lower-income families to buy their own homes, despite government incentives purporting to help increase minority ownership.
Lisa Covington, a home-health aide, owned a modest, two-bedroom home in central Philadelphia. When she and her family moved to Maryland, she sold her house and began looking for a new one in North Baltimore.
She has worked for the same company for two years, earns a modest but reliable salary, paid off her last mortgage with a good payment history, and hopes to find a house within her means. Yet, two years later, Covington is living in a small apartment with her husband and 5-year-old son. A late financial aid payment from years ago, according to one lender, makes her ineligible for a mortgage. She has been turned down by several lenders.
Covington wonders why lenders are unwilling to offer mortgages to those who, like her, have a solid work background but lack the credit history to back it up. And still, she wants to know why other, mostly subprime, lenders are willing to lend her the money to buy a house, but at higher rates and credit insurance she is unable to afford. Covington is a prime target for a predatory lender, and she knows it. So, she has decided to wait.
Still, she finds the situation unsettling. "I'm in an apartment now, and I'm paying over $500 a month," Covington said. "To me, it seems like I'm just throwing away money when I could be putting it into a house."
Catherine Dorsey, a local real estate agent, consumer advocate and regional vice president for the National Association of Real Estate Brokers, has witnessed the effects of predatory loans, in particular on Baltimore's elderly.
Recently, she was contacted by an elderly couple who were being forced to sell their home. They sought her services as a real estate agent, but soon discovered that the mortgage on their home was well beyond market value. That was not all.
"When I talked to them and looked over their papers, I realized it would never sell for that much," Dorsey said.
Over market value
"I contacted the financial company that had financed their home and found out they had appraised it at $20,000 more than that property was worth. So I couldn't have sold it, because no one was going to pay that much over the market value," she recalled.
The couple, a man suffering from early Alzheimer's disease and his wife, who was inexperienced in making financial decisions, had fallen prey to a refinancing scheme.
"Their credit had gotten bad, because they had been putting all their money into this mortgage that was almost $800. Their total income was $1,500 a month," Dorsey said. "They have to buy their own medicine, and they have to eat, and they couldn't do it. They just didn't have enough."
So, the bills piled up. They were ineligible for debt consolidation, because, as a result of the high mortgage payments, their debt far surpassed their income. They were ineligible for a subprime loan, because their credit had gotten so bad.
Dorsey wanted to help them, however she could.
She called the finance company that refinanced the couple's loan.
"I wanted to know who the appraiser was who appraised the property that was only worth $45,000. ... They wouldn't tell me. So, I told the district manager that if he didn't refinance them at the fair market value of that property or lower what he had them owing, then I was going to go to the Banking Commission," Dorsey said. "They reduced that amount from $65,000 down to $45,000."
Then, she lent the couple the money, interest-free, to pay their overdue bills. She found a reputable lender who refinanced their loan. The couple now pays $450 a month for their home.
"It happens a lot. I don't see that much of it personally, but when I do, I don't walk away from it. I try to do something about it. A lot of people just don't understand about interest rates and the importance of maintaining good credit."
As for HUD's Credit Watch and similar programs, Dorsey recognizes the challenges ahead.
"It's a difficult task to reach everyone and to get this information out to them. And then sometimes even when you do that, there are victims of predatory lending who are victims because they have bad credit. ...
"With predatory lending, you can buy a house with absolutely no money. ... But those people don't realize they're paying a 13 percent or 14 percent interest rate, and they have a property they can never get rid of, because they will never pay enough into it. No one is going to pay that much money for a house that's not worth that much," Dorsey said.
"The answer is to maintain good credit; save your money, so you can go to a legitimate mortgage company and take advantage. There are some great programs out there."
Predatory practices
Examples of predatory practices in mortgage lending:
"Equity stripping": The lender encourages you to borrow heavily from the equity in your home as an easy way to get additional money, consolidate debt or finance home repairs, knowing that the fees and payments are so high you may not be able to make them. You drastically reduce your equity and, in the worst case, the lender forecloses, takes possession of your home, and strips you of the equity.
"Loan flipping": The lender encourages you to get additional cash by refinancing your mortgage again and again, significantly increasing your debt - because fees are tacked on to each transaction and interest rates might be increased.
"Loan packing": The lender adds charges into the loan contract for overpriced items or items you don't need or use, such as unnecessary insurance plans or phony services.
Home improvement schemes: A contractor talks you into costly or unnecessary repairs, steers you to a high-cost mortgage lender to finance the job, and arranges for the loan proceeds to be sent directly to the contractor.
Mortgage servicing schemes: After getting the loan, you're told you owe additional money for bogus taxes, legal fees or late fees. Or, if you try to pay off the loan, the lender provides inaccurate information that causes you to pay too much or discourages you from refinancing with another lender.
SOURCE: FDIC Consumer News. Additional consumer information is available online at www.fdic.gov.