Abusive Mortgage Lending
- Mary Hunt <i>The Cheapskate Monthly</i>
- 2004 7 Jul
If you own your home, it's likely to be your greatest single asset. These days with interest rates so low and lenders loosening their requirements, there's a lot of abusive mortgage lending going on.
Abusive lending practices range from equity stripping, interest-only scams and loan flipping, to hiding loan terms and packing a loan with extra charges. You need to know how to protect yourself or you could lose your home.
You need money. You've built up equity in your home but you might have spotty credit. A lender tells you that you could get a loan, even though you know your income is just not enough to keep up with the monthly payments. The lender encourages you to "pad" your income on your application form to help get the loan approved. The lender doesn't care that you can't keep up with the monthly payments. He's out to steal your home. As soon as you can't make a payment, the lender will foreclose-taking your home and stripping you of the equity you have spent years building.
You've fallen behind in your mortgage payments and another lender kindly offers to save you from foreclosure by refinancing your mortgage and lowering your monthly payments. Or, you are a first-time buyer and quite surprised you can qualify for such a large loan. Look carefully at the loan terms. The payments may be lower because the lender is offering a loan on which you repay only the interest each month. At the end of the loan term (usually 3 to 5 years), the entire amount that you borrowed is due in one lump sum called a balloon payment. If you can't make the balloon payment or refinance, you face foreclosure and the loss of your home. An interest-only loan is a huge red-flag that indicates you are getting in over your head. If you can't make that balloon payment on time or refinance for the full amount, the lender will swoop in for the kill and you'll be out on the street with the kids, your La-Z-Boy and big screen TV.
Suppose you've had your mortgage for years. The monthly payments fit nicely into your budget, but you could use some extra money. A lender calls to talk about refinancing, claims it's time the equity in your home started "working" for you. You agree to refinance and cash out a tidy sum. After you've made a few payments on the loan, the lender calls to offer you a bigger loan for an even lower rate. In this practice, often called "flipping," the lender charges high points and fees each time you refinance. With each refinancing you've increased your debt, reset the clock and paid dearly for some extra cash.
The "Home Improvement" loan
A contractor offers to install a new roof or remodel your kitchen at a price that sounds reasonable. You tell him you're interested, but can't afford it. He tells you it's no problem-he can arrange financing through a lender he knows. You agree to the project, and the contractor begins work. At some point after the contractor begins, you are asked to sign a lot of papers. The papers may contain blanks or the lender may rush you to sign before you have time to read them. The contractor threatens to leave the work on your house unfinished if you don't sign. You sign. Only later, you realize you signed a home equity loan. The interest rate, points and fees seem very high. To make matters worse, the work on your home isn't done right or hasn't been completed. The contractor, who may have been paid by the lender, disappears into the night.
Credit insurance packing
You've just agreed to a mortgage on terms you think you can afford. At closing the lender gives you papers to sign that include charges for credit insurance (insurance on a debtor in favor of a creditor to pay off the balance due on a loan in the event of the death or disability of the debtor) or other "benefits" that you did not ask for and do not want. The lender hopes you don't notice this. If you do notice, you're afraid that if you ask questions or object, you might not get the loan. The lender may tell you that this insurance comes with the loan, making you think that it comes at no additional cost. Or, if you object, the lender may even tell you that if you want the loan without the insurance the loan papers will have to be rewritten, that it could take several days, and that the manager may reconsider the loan altogether.
Never allow a lender to rush you into signing. Always read documents before you sign them, and if you don't understand, don't sign.
You can protect yourself against losing your home to inappropriate lending practices. Here's how:
• Agree to a home equity loan if you don't have enough income to make the monthly payments.
• Sign any document you haven't read or any document that has blank spaces even if the lender suggests it's okay to do so.
• Let anyone pressure you into signing any document you do not understand.
• Agree to a loan that includes credit insurance or extras you don't want.
• Let the promise of extra cash or lower monthly payments get in the way of your good judgment.
• Ask specifically if credit insurance is required as a condition of the loan.
• Guard your home's equity fiercely. Once spent it will be difficult, if not impossible, to replace.
• Keep careful records of what you've paid. Challenge any charge you think is inaccurate.
• Check contractors' references and get more than one estimate.
• Read all items carefully. If you need an explanation of any terms or conditions, talk to someone you know and trust.
© 2004 The Cheapskate Monthly. All rights reserved. Used with permission.
"The Cheapskate Monthly" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.