Some states have begun to look at the mortgage industry with a regulatory eye. While the lenders are mounting a defense against this intrusion, both sides have something to learn about the current state of mortgage lending in the 21st century.

Spurred on by low interest rates, houses were snatched up at an ever-increasing rate over the last couple of years even as prices soared. This had the net effect of doing two things. It increased the wealth of this nation much the way stocks did in the late nineties and it made buying a house a very expensive proposition.

New home shoppers were faced with some very difficult decisions not the least of which was financing. Lenders created some very interesting ways of accommodating this group of hungry buyers, not the least of which proved to be predatory.

It is estimated that over 12% of all mortgage loans may be what are commonly referred to as sub-prime. States have taken a look at this change in homeownership much closer as foreclosures of these properties have begun to climb.

A typical fixed rate, 30-year mortgage would cost the average qualified buyer around 6.25% depending on credit ratings, income, and other considerations. A loan of this type would not carry any pre-payment penalties and would be typically purchased by a borrower with a better understanding of how the process works.

Sub-prime borrowers, on the other hand, tend to be caught up in the moment and the excitement. They often fail to understand the costs associated with the purchase of a mortgage. They are susceptible to onerous and often hidden fees for refinancing, pre-payment penalties, and what are generally higher mortgage rates because of their lower than average credit scores.

These financial burdens often begin to weigh on these inexperienced borrowers within the first year. States, seeking to take action on behalf of the consumers under their care are finding little help from the federal government and have had to take matters into their own hands. Twice they have sued unscrupulous lenders and won settlements, once against Household for $84 million and recently with an award of $325 million from Ameriquest Mortgage Co. But it is not just huge financial institutions who are preying on these unsuspecting borrowers.

What the states want is the ability to go after national banks. These banks come under the federal jurisdiction of the Office of the Comptroller of the Currency. Taking umbrage with aggressive state’s attorney generals, the OCC has sought to stop any state action against these types of lending practices. The OCC has also done little to address the situation of predatory lending, mostly turning their heads to the issue.

All eyes will be on Elliot Spitzer, the New York attorney general as he seeks to overturn the OCC’s roadblock in his state. Labeled as anti-consumerism, Spitzer’s attempt in the Second Circuit US Court of Appeals will rewrite how these sorts of problems will be handled in the future between states and the federal government.

The OCC is resisting giving the states power to penalize banks under their jurisdiction but so far, offers no real reason why The problems listed below are not exclusive to what we call poor and under educated borrowers. These types of practices can occur when anyone is faced with a sudden economic hardship and no place else to go for help. The sub-prime borrower is subject to the following unscrupulous practices.

The first is called Equity stripping. This allows the lender to foreclose on any default in equity payments. The application, usually falsified in some way to allow the borrower to get more money than they can afford to repay is simply a set-up for future disasters. The borrower then runs into payment difficulties, which forces them to relinquish any equity that may have accrued in the property. Done enough times, it can create a negative equity forcing foreclosure.

Conveniently this can lead to the second step in the sub-prime spiral, the loan flip. This predatory move amounts to a series of loans, each refinancing the previous and in turn, generating fees for the lender as often as every six months. Each loan involves increasingly questionable paper work and qualifications.

Many of these sub-prime borrowers understand the risk they are taking even if they do not understand what kinds of risks they are. Often, without the borrowers knowledge, the lender will add a credit insurance policy to the loan. In the confusion, the borrower may simply agree. If they are not informed of this action, this is considered an illegal act.

Borrowers with good credit are often under enormous pressures during the closing of these types of loans. It is, after all, a big financial decision. Borrowers with less understanding of the situation but with enough savvy to realize that they are fortunate to be even at the table with a pen in hand are the most vulnerable to the bait and switch. Unscrupulous lenders will add charges during this process that were not agreed upon prior to closing. Sub-prime borrowers cave easily under such pressures and sign.

It is important to remember three things should you ever find yourself faced with this type of situation: 

1. Faced with the understanding that you cannot afford your home, attempt to sell it before the lender forecloses. In some areas, you may find that during the brief time you lived in the house, the property may have appreciated giving you some exit money in the process.

2. Don’t accept any offer that is on the table. If you cannot afford to buy the home, don’t. There are some serious arguments that suggest that the so-called tax advantage to owning a home may be somewhat overstated.

3. Determine how much the house is worth and readjust your budget accordingly. Sometimes, a financial rough spot will be temporary. If it is not, make that determination early and either realign your budget or throw in the towel.

Some of the most common ways to save money on that mortgage are the ones easiest done before you look for a home: Fix your credit score, save for the down payment, re-adjust your budgets.

Good luck to Mr. Spitzer in his latest battle. With as many people in America leveraged to the hilt, his efforts may save more than the current batch of sub-prime borrowers and will definitely protect all of us who will ultimately pay for these problems in increased fees and rates charged by banks and other financial institutions.

© 2006 Paul Petillo
Editorial Archive

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Paul Petillo
Blue Collar Dollar.com
Portland, OR USA
(501) 313-5252
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