Borrowers Need to Understand What They’re Getting Into

Mount Vernon News - November 9, 2005

Mount Vernon News

by Dylan McCament

MOUNT VERNON – Losing a home to foreclosure can be one of the most devasting experiences an individual could have. And, unfortunately, foreclosure and bankruptcy often go hand in hand.

By the time people come to see a bankruptcy lawyer, they’re resigned to the fact that they are in pretty deep, said local attorney Todd Drown. They re being harrassed by creditors, they re not sleeping; it s not uncommon for their marriage to be on the rocks.

Some people try to keep their home, a process made easier if they remained current on their payments and do not have too much equity in the house. Others are so overwhelmed by medical or credit card debts, or are committed to a house payment they can t afford, that, ultimately, the house ends up in a sheriff s sale. It takes an attorney to file a foreclosure. Local banks tend to hire local counsel, whereas big lenders hire huge firms with whom they have a contract.

From 1994 to 2004, the number of foreclosures in Knox County has doubled, according to information from the Ohio Supreme Court. In
Ohio, there were 17,026 filings in 1994, 55,274 in 2002, and 59,007 in 2004. Job losses, unexpected and exorbitant medical bills, the growth of nonconforming or subprime lending, and predatory lending are often named as the culprits.

Drown said that in his view, a flat economy is the main force driving this trend, coupled with predatory lending practices and the increase in subprime lending. But, he said, there are many contributing factors: Layoffs, a reduction of work hours, households needing two incomes but only one spouse working, unforseen medical emergencies and expenses, and people with massive credit card debt with disgraceful and usurous interest rates running as high as 27.99 percent.

Asked to define predatory lending, Drown said that to him, it is the practice of charging borrowers extremely high fees and higher than necessary interest rates. Many of these people could be financed conventionally with a little work, but they can easily be financed in a nonconforming loan. There is a cap on what mortgage lenders can make on conventional loans; the caps on subprime for nonconventional loans are very, very high. 

“In my estimation, predatory lenders are not interested in a life-long relationship,” he said. “They want to make a ton of money on one deal.”

Unfortunately, Drown said, people often shop around more for a car loan than they do for a mortgage. Before getting into any home loan, borrowers should understand what they are getting into.

“Call different people, call your local lender, call your lawyer, call your CPA, ask questions, ask about fees,” said Drown.

Often, if a lender is making high profits off fees, it’s hard to recognize it. If an unscrupulous lender senses a borrower has an aversion to fees, they may up the interest rate, which Drown said in many cases is “the silent killer.” Many ads on television offer loans with no closing costs; the cost is probably being absorbed in higher interest rates. It might be the case that the borrower is better off with higher fees and a lower rate, he said.

The rise of subprime lending is a leading factor in the state’s rising foreclosure trend, according to the Ohio Community Reinvestment Project, a collaboration of nonprofit consumer groups based in Columbus. Although subprime lending provides the needed service of helping people with poor credit get loans, it has opened up a pandora’s box of predatory lending, according to the report.

“The foreclosure problem has become so severe in Ohio that it must be viewed as a public problem, to be addressed through the use of public institutions and resources — including, if need be, regulatory changes in Ohio law,” the report reads.

Doug Leonard, vice president of First-Knox National Bank, said there are a lot of unscrupulous lenders out there, but it is hard to say how much predatory lending — which he said is something of a buzz word — actually goes on in Knox County. He said there are a lot of loan products available nowadays which allow 100 percent financing, or interest-only loans whose monthly payments begin low and later skyrocket. It’s also difficult to know where loans have originated, he said, judging from foreclosures listed in the paper. The loans may have been sold three or four times by out-of-state lenders.

Mainly the lenders listed as plaintiffs in sheriff sales are not local. Competition among mortgage lenders in large metropolitan areas is very great, and many working for them are trying to make a living off straight commissions, so the motto is “sell, sell, sell,” said Leonard. This is, of course, not true for all, he added — there are good and bad mortgage companies just as there are good and bad bankers.

If someone does opt for a subprime loan, they should understand whether or not their monthly payment is a stretch for them to make. They also need to make sure all fees and annual percentage rates have been totally confronted from the beginning.

“I’ve heard horror stories of people who go to close the loan and have to pay $5,000 in fees,” Leonard said.

There is an entire market of subprime mortgages just as with conventional mortgages, he said. In recent years he has seen an overall “relaxation of underwriting standards and criterion.”

“You can get approved for a loan a lot easier than you could years ago,” he said.

The debt-to-income ratio has changed tremendously as well, he said. Whereas previously an installment was between 36 and 40 percent of a person’s income, now it’s easy to get approved for loans whose payments take between 40 and 60 percent of one’s income. If you wade through the foreclosure data, you will find a high number of foreclosures stemmed from subprime lending, he said.

He said if someone applies for a loan at First-Knox and they have poor credit, too much credit card debt, or their employment is suspect, the bank would rather deny the application and have the borrower go away a little angry than to get into a loan for which they are not suited. If a home loan applicant doesn’t meet underwriting standards, First-Knox refers them to a subprime lender out of Newark that does an excellent job of helping them get back on track.

“We’re trying to build relationships,” he said. “We’re not going to put anyone in a situation they can’t handle.”

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