Millions of American homeowners are at risk of losing their homes to foreclosure because they signed up for adjustable rate mortgages they can no longer afford.
If you are one of them, it may be possible to refinance to save your home. But you should know predatory lenders are waiting to pounce on you in your hour of desperation. Sounds melodramatic, but it's true.
If buying a home is the American dream, then predatory lending is the American nightmare. Predatory lending typically occurs in refinancing deals. Unscrupulous lenders cause people to lose their homes and neighborhoods to lose their luster. Aggressive mortgage brokers target the poor, the elderly, minorities and women, but it can happen to anyone.
Charles K. is a combat veteran who lives on a fixed income. He was a month or two behind on his mortgage, so he wanted to refinance in hopes of arranging a lower monthly payment. The mortgage broker promised Charles he could lower his payment from $980 a month to $880. The broker advised Charles to stop making payments to his old mortgage company, because his new loan would be ready soon.
But then the broker waited more than a month to schedule Charles' closing. At that closing, Charles learned his new monthly payment was $1,250 -- hundreds more than the old payment he had been struggling to make. By now, Charles' old mortgage company was threatening to foreclose on his home, so he felt trapped and he signed for the new loan.
When I investigated Charles' case, I learned his monthly payment was jacked up illegally. By law, the broker was supposed to inform him the price was going up. The reason the monthly payment was so high is that the brokerage firm charged an unconscionable $13,000 to process the loan -- pure profit for the broker. This abusive fee was then rolled into Charles' loan, so he ended up owing $146,000 on a house that was only worth $126,000.
Charles couldn't afford his new monthly payments. Eventually, he declared bankruptcy and the bank sold his home on the courthouse steps. He'd been trying to avoid foreclosure, but that's exactly what he got.
Some predatory lenders purposely structure their loans so the monthly payments are too high for the borrower. When the borrower defaults, the lender offers yet another loan with additional closing costs and fees. This is called "flipping."
Consumer advocates have documented cases in which homeowners were "flipped" into more than 10 different loans in just four years. One homeowner just wanted to borrow $26,000 but ended up paying $29,000 in closing costs and fees!
1. Predatory lenders often promise one set of terms when they talk to you, then jack up the price at closing. It's a sign that you're in for a rough ride.
2. If a mortgage broker asks you to sign a blank application form, that's a red flag. The broker may intend to falsify your credit history so you'll qualify for a loan you can't afford.
3. Adding co-signers is another ploy. Unscrupulous brokers may ask you to come up with a co-signer, knowing full well that person doesn't really intend to contribute to the payments. It's another way of getting you an expensive loan that the broker will make a lot of money on.
4. If a lender refuses to give you a copy of the good-faith estimate, that's a signal that the estimate will change. The lender doesn't want you to have written proof of the terms you were first offered.