Sub-prime lending -- and the possibility of predatory lending activities -- are widespread nationwide. This is the conclusion of a study entitled "Separate and Unequal: Predatory Lending in America" just released by ACORN and the ACORN Housing Corporation, (the Association of Community Organizations for Reform Now).
A "sub-prime" loan is a creation of the mortgage industry. They are loans for homeowners who may be unable to qualify for conventional -- i.e. "prime" loans -- at normal mortgage interest rates. To compensate a lender for taking a potentially higher risk that the loan may go bad, sub-prime rates carry a higher interest rate than conventional, prime loans.
Many of those who obtain high-cost sub-prime financing are minority homeowners. As an example, according to the Federal Financial Institutions Examination Council (FFIEC), which collects lending data from more than 7,800 financial institutions in the United States, sub-prime lenders accounted for 40.48 percent of all refinance loans made to African-Americans in Washington, D.C. last year. This compares with 26.39 percent of all refinance loans made to Latino homeowners, and just 9.34 percent made to white homeowners.
Clearly, not all sub-prime loans are predatory, but according to the ACORN study, "just about all predatory loans are subprime, and the subprime industry is a fertile breeding ground for predatory practices."
ACORN -- a community organization of low- and moderate-income families, with over 100,000 member families organized into 500 neighborhood chapters in 40 cities across the country -- defines "predatory lending" as when "loan terms or conditions become abusive or when borrowers who would qualify for credit on better terms are targeted instead for higher cost loans." Yet, according to both Fannie Mae and Freddie Mac , a large number of borrowers who obtained sub-prime loans could have qualified for conventional mortgages.
What are predatory practices? ACORN lists the following:
Financing Excessive Fees into Loans
According to the ACORN study, borrowers in predatory loans are routinely charged fees of just under 8 percent of the loan amount in fees, as compared to the average 1-2 percent assessed by conventional mortgage lenders. I have personally been involved in representing a homeowner who was charged 18 points on a $50,000 mortgage, or $9,000. This amount was built into the loan when the homeowner unknowingly signed the loan documentation.
Charging Higher Interest Rates Than A Borrower's Credit Warrants
ACORN concludes that "borrowers with perfect credit are regularly charged interest rates 3 to 6 points higher than the market rates; with some subprime lenders, there simply is no lower rate, no matter how good the credit."
Making Loans Without Regard To The Borrower's Ability To Pay
Many subprime, predatory lenders make loans with the full knowledge -- and indeed intent -- that ultimately the homeowner will not be able to make the monthly payments, and the lender will foreclose on the property and resell the family home to some other unsuspecting person, and the cycle will begin all over again.
A balloon payment requires that after a certain number of years (usually between 5 and 7) the borrower must pay off the outstanding balance of the loan. The loan is amortized over a period of 30 years, and at the time the balloon payment becomes due, a sizable balance remains.
It must be pointed out that a balloon payment, per se, is not an evil practice. Many legitimate lenders offer such programs to their borrowers.
However, according to ACORN, "for most borrowers in subprime loans, they are extremely harmful. Balloon mortgages, especially when combined with high interest rates, make it more difficult for borrowers to build equity in their home."
The buyer makes regular (often high) mortgage payments for a number of years, and suddenly is forced to refinance in order to pay off the existing loan. Once again, the cycle repeats itself, for often these homeowners have no alternative but to begin anew with another sub-prime, predatory loan.
Single Premium Credit Insurance
When you buy a house, you are often deluged by mail from insurance companies attempting to sell you credit life (or credit accident) insurance. This insurance would pay off your mortgage should you die or become unable to make the mortgage payments because of a health condition. There is even credit unemployment insurance, which would cover your loan should you become unemployed.
This columnist has often criticized such insurance, since the premium payments are high, and do not take into consideration the fact that the mortgage loan is decreasing on a yearly basis. If a homeowner wants insurance, obtain it from a legitimate insurance company, and include it as a part of your overall estate planning tools.
According to ACORN, while such credit insurance is "rarely promoted in the 'A' lending world, ...it has been aggressively and deceptively sold in 'single premium' form in connection with higher cost loans, and then financed into the home loans, costing borrower's equity in their homes, and forcing them to pay interest on the insurance premium for 30 years", or at least until they pay off that loan or get foreclosed.
As ACORN explains, "there is widespread agreement that financing single premium credit insurance into mortgage loans is abusive and illegitimate." Both Fannie Mae and Freddie Mac will not purchase loans which include such insurance, and the Consumer Federation of America -- a national consumer organization -- has labeled such insurance "the worst insurance rip-off in the county."
Nevertheless, many sub-prime predatory lenders still keep adding this insurance when they make their loans. Indeed, if unsuspecting borrowers are sold multiple forms of credit insurance, the single premium often can be as high as $10,000.
The ACORN study is a comprehensive analysis of both the practices -- and the costs -- of predatory lending practices throughout the county. According to ACORN:
Predatory loans do tremendous damage both to individual borrowers and their families as well as to entire communities. They rob borrowers of the equity in their homes and their peace of mind as they struggle to pay unaffordable mortgages or face the loss of their homes, and in the worst cases lead to forced sales or to foreclosure. They can turn the dream of homeownership into a nightmare. The threat is particularly serious if we consider the fact that for most Americans, the equity in their homes represent the majority of their lifetime's accumulated wealth.
For example, ACORN reports that in Washington, D.C. alone, over $7,700,000 in home equity is stripped from unsuspecting homeowners on a yearly basis because of these predatory practices and predatory loans.
In its conclusion, ACORN makes the following findings:
- Minorities are much more likely than whites to receive a subprime loan when refinancing.
- The concentration of subprime loans is greatest among lower income minorities.
- Subprime lenders also target lower income white homeowners.
- From l993 to 2000, the rate of growth in the number of subprime refinance loans to minorities was larger than the rate of growth to whites.
- African-American homeowners were 4 times more likely than white homebuyers to receive a subprime loan, and Latinos were twice as likely to do so.
- The rate of growth of subprime lending has been much faster than the rate of growth of prime lending, especially to African-American borrowers.
There are Members of Congress who claim they cannot accurately define or describe predatory lending practices. It is suggested that they carefully read the ACORN study, which is available on the Internet at www.acorn.org , or by contacting them at 202 547-2500.
The ACORN study contains voluminous information relating to a number of selected cities in the US. For details regarding your local metro area, check the ACORN study index.
For more articles by Benny Kass, please press here .
Copyright 2001 Benny Kass. Posted by Realty Times with permission.