Predatory Lending a Key Factor in Foreclosures
Hamilton Journal-News - December 13, 2005
By Chris Dumond
HAMILTON – Complicated terms and huge dollar amounts can make financing a home a frightening prospect.
Marauding lenders are lurking to capitalize on those fears.
Authorities say predatory lending, where lenders or brokers take advantage of buyers through high-cost, inappropriate loans, is a major reason why foreclosures have increased more than 300 percent in Butler County in the last decade.
Butler County ranked 11th among Ohio’s 88 counties in foreclosures per person, according to a 2004 report by Policy Matters Ohio, a nonprofit research agency.
“That happens quite often here,” LifeSpan credit counselor Ruth Atha said of predatory lending. “It happens particularly with the elderly.
Unfortunately, they move in on them and they’re trusting people.”
Predatory lending comes in several forms, but a common trick is to sell a buyer on a monthly payment without explaining what’s included in the payment, Ohio Department of Commerce spokesman Dennis Ginty said.
Lenders may offer a lower payment by leaving out costs such as insurance and taxes, by extending the term of the loan, or by including a large payment at the end of the loan known as a balloon payment.
“It’s important for borrowers to be able to compare apples to apples and to ask questions,” Ginty said. “One important question to always ask is whether that payment includes taxes and insurance.”
If not, buyers could be hit with those unbudgeted costs after the fact.
Equity stripping happens when lenders offer loans based not on the buyer’s ability to pay it back, but in their ability to foreclose on the home to recapture their costs. According to the Department of Commerce, some lenders will illegally encourage buyers to overstate their income on the application to qualify them for the loan, take their fees and then take the house once that buyer realizes he or she can’t afford the payments.
Other schemes involve inflated appraisals which increase buyers’ debt and fees paid to brokers, packing unnecessary credit insurance into home loans and repeatedly refinancing debt at lower interest rates all the while recharging the buyer for fees and other closing costs.
Staying out of trouble
Ginty said the best way to avoid becoming a victim of predatory lending and foreclosure is to be informed. “Don’t sign anything until you’re confident you can repay the loan and that you understand and agree with the terms of the loan,” he said.
Part of that is doing some research before visiting a lender, he said. Buyers should review their credit histories and check prevailing mortgage rates. One source for those rates is bankrate.com.
Buyers should also check with the Department of Commerce to make sure their lender is licensed. Disciplinary actions are a matter of public record.
Karen Stypinski, president of the Ohio Association of Mortgage Bankers and an account manager with Washington Mutual Home Loans, said buyers should know what they can afford going in to the lender’s office, and to focus on the entire deal they’re being offered instead of a monthly payment.
“The best way to make sure you re getting good terms is to interview your lender,” Stypinski said. “There’s nothing wrong with someone going to see two or three different lenders. And if they’re not answering your questions or explaining things to where you re satisfied, don’t be afraid to walk away.”
Atha advises buyers not to sign anything on a first visit to a lender and to take away information in writing to review.
Even better, Ginty said, is to have loan documents reviewed by an attorney.
Worse than signing things buyers don’t understand is when buyers sign blank documents or falsify income information because it opens the door to mortgage fraud, Stypinski said. A buyer is not only at risk of foreclosure for getting into a loan he or she can t afford, but also criminal penalties.
Getting out of trouble
Atha said the best insurance against foreclosure trouble is to take action before there’s a real problem. If bills start piling up or there is a financial catastrophe such as sickness or unemployment, counselors are available, she said.
“Seek help immediately,” she said. “If you don’t start right away, you’re going to be playing catch-up. People start living on credit card debt or let different payments go and that only works for so long.”
The U.S. Department of Housing and Urban Development provides referrals to housing counseling agencies by calling (800) 569-4287.
Locally, LifeSpan may also be able to provide counseling.
Depending on the lender and the type of loan, buyers may be able to restructure their loans or even get a temporary reduction or suspension of their payments.
When looking for help, though, it’s important to be cautious and to only work with reputable counselors. LifeSpan Director Cheryl Burns said scammers are just as willing to take advantage of those desperate to save their homes as they are to catch people on the front end of the deal.
Getting out of a predatory lending scam often involves a lawyer, Ginty said. Although the Department of Commerce can refer buyers who believe they’ve been scammed to regulatory agencies, they will often have to go to court to nullify legal documents.