I’m having a hard time believing that many of those who might be facing foreclosure aren’t either:
- Themselves to blame for taking out loans they can’t afford now
or
- A victim of unfortunate personal circumstances
I think what it comes down to is that the average person doesn’t have much financial saavy. (To be nice)
If you set them down and tell them that they will have, say, a $1600/month mortgage payment, most people will think if they can afford that payment or not, and say yes or no based on that alone. The know nothing of interest rates, negative amortization, and the like.
To them, the monthly payment is the end all, be all of everything.
I think the term “Predatory Lending” is used because many lending institutions simply KNOW that many people who are using their products are going to be unable to keep up with the increasing payments, and be foreclosed upon. That is okay for the lender, because of the fees, points, prepayment penalties, PMI fees, etc. that are tacked on up front. They make a great deal of money, and still have a valuable house to recoup their original loan.
It seems to be a new business model to have loans and make money upon foreclosures, whereas in the traditional lending sense, a foreclosure was a bad thing for the lender.
For example:
It used to be if I had $100k in the bank, and you needed $100k to buy a house, then it worked out. You got your house, and I got 7-8 percent return on my money. If I had to foreclose, I had to sell the house to get my money back. I didn’t want that, and you didn’t want it.
Today, I would lend you the $100k, you would make payments for years, and after you couldn’t afford the increasing payments, you would owe my $115k, and the PMI insurance company (that you paid for) would give me my $115k. I make more money by you defaulting.
Now, yes, I agree, stupid and desperate people fall into this trap, but it is pretty shameful for lenders to be setting it…
They probably are, but they may still have succumbed to a lender who offered a low “teaser” rate in order to get into homeownership.
There are some lenders that deliberately manipulate the process to take advantage of people who can not say “no” due to circumstances. Ameriquest was successfully sued by the State of Michigan for doing things like delaying closing on refinancing and then “forgetting” to disclose fees until the person was in a dire situation and had to pay them (because starting over would cause them more harm).
Bottom line - Regardless of what some would have you believe, it is not always the person who has the financial problem who is to blame. Nor is it the case that they are not simply smart, not savvy, etc. Unless / until you have been in that person’s shoes, it’s best to hold your opinions about such things.
This story from the San Francisco Chronicle has the stories of some people having mortgage problems. There are a couple of situations here where a broker “forgot” to mention a second mortgage, and things like that.
Which is an entirely logical thing to do if your experience is with renting instead of owning- when you rent, the monthly rent really is the end all, be all of everything. If you’ve lived with your parents or rented all your life, getting your mortgage really is a new experience- there’s not much in your life up to then that compares to it. It’s not surprising that some people make mistakes in a situation they’ve never experienced before.
I’m not certain if this is the definition of predatory lending or not, but I’ll share my experience and observations of what has gone wrong in my area.
A close friend of mine had poor credit but was able to get an interest-only 100% mortgage. Three years later, and he’s never paid a dime of principle. This seems to be working for him, because he has a $30,000 dollar home and lives a very simple life.
In my town, however, people have been buying grossly overpriced homes with similar terms, or worse, adjustible rate loans. These loans were for homes that cost more than 10 times the annual household salary. When they started to get into trouble, they took out equity loans. Then, the market crashed, and their houses are worth much less that what is owed. (Not to mention, the loans for furniture that offered no interest, no payments until whatever date are now coming due.)
Oh, and since I live in Florida, the insurance for a lot of homeowners has as much as tripled this past year, and property taxes are not pretty.
I receive at least 10 loan offers in the mail per week. Interest only or adjustible rate offers for 125% of my equity. People call my house a few times a week, offering the same. I even had a solicitor come to my door last week. I’ll sell my house before I ever take such an offer, but a lot of unfortunate people don’t share my sentiments.
There are a lot of forclosures in my neighborhood and even more for-sale signs.
ETA: Personally, I participated in a bit of a bidding war for an incredibly underpriced home, secured a fixed rate mortgage, and put 50% down. I was raised in a debt-free home and had no family to offer mortgage advice, and I didn’t trust mortgages. And I only borrowed the equivalent of a year’s household earnings. If I hadn’t done the things, I’d be forclosing as well.
Normally, people should be responsible for their own actions. Hey, if you screw up, it’s your own damn fault, and you should be required to pay for your mistake.
However, when a company’s entire business plan is designed around taking advantage of the average Joe’s stupidity, then the company should be required to shoulder the blame for Joe being stupid. If a con artist takes you for all you’re worth, yes, you were stupid and allowed yourself to be taken advantage of… however, the con artist is the one who should go to jail for taking your money.
I’m oversimplifying, of course. I just have no sympathy for the credit companies who know that their customer won’t be able to satisfy the terms of the loan.
There’s no fixed definition of predatory lending. Most states have some sort of predatory lending legislation, but definitions and coverage vary. Part of my job involves keeping up on predatory lending and high cost loan laws in about 14 states.
Here is a report on predatory lending prepared by HUD and the Treasury Department: http://www.hud.gov/library/bookshelf12/pressrel/treasrpt.pdf
A list of seven signs of predatory lending: http://www.responsiblelending.org/issues/mortgage/sevensigns.html
A guide prepared by the Arizona Attorney General: http://www.azag.gov/consumer/Predatory_Lenders_Book.pdf
Here is a description of predatory lending from New York’s Attorney General:
http://www.oag.state.ny.us/consumer/tips/predatory_lending.html
And here is a longer one from the Cleveland Fed:
My wreck of a cousin was a victim of such lending.
She has been a drug addict, non worker, who I would consider “white trash”. I love her but her choices have been abysmal and it always someone else’s fault.
She received a windfall settlement from an insurance claim of about 100K
My advice to her was to buy a 50K house, invest the rest in something that was just a little hard to cash in, and then live life knowing her home was paid for and she had a cushion in case of emergency.
But this was not to be. She ended up putting 20k in a Camero and placing 80K down on a 150K house that had a pool. The pool was a must have.
Mind you she had no income or any ability to pay the mortgage, but with such a large down payment she had no problem getting a loan.
Well, when she got behind on the payments she was approached by the broker to take out a second mortgage to “help out” well 4 grand in broker fees got her a 19 percent 2nd mtg.
When the payments got behind on both loans the broker said she should just refinance and cash out some equity while combining both loans into on easy payment.
Another 5 grand in fees. This happened like 3 more times, every time eating away at her equity but letting her get 6 or 7 grand for herself while paying 4 or 5 grand in fees.
She lost the house and is now homeless. Now I know she did all of these transactions and I know she did not listen to me, but the mortgage broker made about 25k in fees doing all these transactions.
I would consider this predatory lending…
From your story, the New York attorney general’s description of predatory lending, and the stories I read in the Chronicle, “broker encouraging homeowners to do things that are not in their long-term interest” seems to be a common theme. A couple of the people interviewed for the Chronicle article seem to think that their first mistake was to trust their broker.
To respond more directly to the OP:
Only a small subset (tiny in fact) of the subprime mortgages that are in the news these days are the result of predatory lending, under the relevant definitions. While the subprime market is a major target for predatory lending, the fact that a subprime loan was closed doesn’t mean it was predatory. Most of the definitions include some form of high-cost loan test; brokers and mortgage bankers try to avoid originating a loan that flunks the high-cost test; and that’s not new. In general, nobody will buy them. You could argue that the statutory definitions of predatory lending are underinclusive, I suppose; more to the point, you could argue that if the loans were priced to reflect the true risk of default, they would be high-cost loans.
But again, under most statutory regimes, it’s not illegal to originate a high-cost loan. Certain disclosures must be given; often the originator must demonstrate that there is a tangible benefit to the borrower; there are limits on refinancing them within a given time-frame. But as long as the lender stays within these rules, the loan doesn’t violate any laws.
Subprime loans are those to those with marginal credit. They have a higher default rate. They tend to be a bit more sensitive to economic downturns. They sort of go hand-in-glove with alternative credit mortgages (loans where the borrower isn’t required to provide documentation). These mortgages were always an inside joke in the industry. We called them liars loans. And not surprisingly people took the opportunity to lie. Lots of people: “the Mortgage Asset Research Institute recently found that almost all would-be home owners had exaggerated their income, with almost 60 per cent inflating it by more than 50 per cent.” http://us.ft.com/ftgateway/superpage.ft?news_id=fto080820071539268198&page=2
These people didn’t necessarily have bad credit; in fact you needed a decent credit score to qualify for a no doc or stated loan program. But when you borrow based on a grossly inflated income amount, your payments may well account for a huge portion of your true income. That works until your rate floats up and you can’t refinance; or you lose overtime; or your credit card interest rate shoots up to 29% (which, IMO, is equally predatory); or gas prices double; or you get sick; or your wife loses her job. Then it doesn’t work so well. Some of the impact of these factors could be softened by yet another refinance or a quick sale of the home. But recently property values are stagnant or worse and sale times are slower. Suddenly, the borrowers and lenders are both stuck with their bad decisions.
Because Gfactor has answered the factual question, I’ll delve into anecdotes…
At my firm, we do a fair amount of pro bono work. We see trends, year to year, regarding what kinds of pro bono cases we end up with. For the past year, there’s been a pretty significant increase in real estate-related fraud. To the OP’s first category, I agree that there’s a certain element that makes us want to say that people are dumb for getting themselves caught up in a situation largely of their own making. But many of the cases we’ve seen involve either out-and-out lies regarding the financing, or instances where the explanation (in Spanish) doesn’t match the documents (in English). So while I agree that in some cases, someone who knows better takes out a loan they shouldn’t – usually gambling that property values will increase or their take-home pay will go up enough to cover the increase when the rates adjust – there are, unfortunately, a number of people who are illiterate, or uneducated, or lied to, or something like that. And it’s those kind of fraudulent transactions that, while a minority of the market as a whole, are some of the most infuriating to me.
As for the second category, that’s a whole other ball of wax, likely tied into things like health care and bankruptcy laws.
Agreed. I’ve also seen plenty of liar’s loans where the broker or loan officer completed the paperwork for the borrower and simply wrote down what needed to be there to get the loan approved, telling even semi-sophisticated borrowers that “that’s how it’s done,” or some such.
Also, a lot of people got outright swindled into alt credit loans by brokers or loan officers who were involved in flipping schemes. The individuals would be told that the parties to the transaction just needed to “borrow” their credit, and that they would quickly be removed from the transaction with big dollars for their trouble. Some really were until the bubble burst and the properties couldn’t be quickly sold or refinanced.