Date: August 30, 2007
Subject: Predatory Lending

“Bad credit OK!”
“We can match you with a lender regardless of your credit history.”
“You pick your payment!”
“Nothing down and money in your pocket!”

Sound like a trick? It probably is.

August 30, 2007 - By Ron Farina, C.E.O., New Buffalo Savings Bank

Unfortunately, individuals who can least afford a mortgage are the targets of these unscrupulous lures. Around 20% of all mortgages from 2004 -2006 were subprime, according to John Lonski, chief economist for Moody's In­vestors Service.

The term “subprime” loan refers to the borrower’s less than adequate creditworthiness. Most consumers have a Credit Score somewhere between 600 and 700 on a 300-900 point system. A score of less than 620 is considered subprime. 

The subprime borrower has proven to be far more likely to default on a mortgage. The Michigan Bankers Association reports subprime loans accounted for more than half the foreclosures nationwide in 2006. It is the American dream to own a home and these homeowners were sometimes willing to do anything to own, or keep, a home. They were, and are, an easy target.

Loans for people with healthy credit scores and solid financials will be generally straight forward and uncomplicated. The subprime loan can be anything but uncomplicated. It is a high risk proposition for the lender, so the rate can be higher than for a prime loan. The subprime loan is not only a risk for the lender, it has turned out to be a dangerous risk for the borrower as well.

 

The sub prime borrower is vulnerable to
Predatory Lenders.

 

Not all lenders are honest. Some in the subprime mortgage business prey on inexperienced and desperate borrowers. Here are just a few of the tactics used.

- The loan may have a prepayment penalty. If the borrower tries to sell or refinance to a lower rate, they get slammed with a huge fee.

- The loan may be a balloon with interest-only payments. The payments are manageable in the short term. The balloon payment comes due and the entire loan balance must be paid. Unable to refinance or sell the house, the property ends up in foreclosure.

- Sub prime borrowers hide extremely high fees in the closing costs and roll them into the loan.

- Some lend the money even though they know the borrower can’t afford to repay the loan.

- Then, there are “liar loans”. This is where the loan customer lies about their income, or the loan broker lies by filling in a fictitious income for the applicant, or the appraiser lies by inflating the value of the property. 

- Adjustable Rate Mortgages, ARMs, have been in the news lately as the cause of many foreclosures of subprime loans. A loan starts out at an affordable rate then increases over time, as does the payment.  Either by negligence or fraud on the part of the lender, or indifference on the part of the home buyer, the result is the same. The increased payment cannot be made, gigantic late fees are incurred, and the home is in jeopardy. What seemed like a good deal, soon becomes unmanageable. People are losing their homes, and the mortgage companies holding the loans are also in trouble.

 

- A subprime borrower’s loan may be bought and sold multiple times on the open market. Bankruptcies are on the rise among companies in the business of purchasing these loans. Homeowners with payment difficulties are finding their loans restructured or foreclosed by companies they’ve never heard of. 

What does this mean for the average consumer
hoping to buy a home.

To an ethical lender, credit score is only one aspect for qualification. Many other elements factor into the decision to lend or not. Loan professionals evaluate many facets of an individual’s circumstances including cash flow and capacity to repay the loan. At most community banks, a conventional loan must qualify using government underwriting guidelines.

Our community banks uphold responsible underwriting guidelines. Most importantly, we  counsel applicants on what they can and cannot afford, and suggest ways to improve their credit score so they may be able to borrow in the future.

Adjustable Rate Mortgages can be a very appropriate loan for some borrowers. However, the underwriting must be based on the fully adjusted interest rate, the highest rate, not the initial lower rate.  With New Buffalo Savings Bank, and most likely at any responsible local community bank, if the borrower can’t afford the higher payment, the loan will not be granted.

Although community banks sell a portion of their loans to federally funded entities like Fannie Mae and Freddie Mac, they can elect to retain the servicing. That means if the loan customer has a question or problem, they have someone to speak with right in their local bank.

Even with prime loans, borrower beware. All the pitfalls of subprime lending can be applied to prime loans as well. There can be danger in finding the absolute lowest rate for a mortgage. Be careful to consider every aspect of the loan including undisclosed closing costs, who it will be sold to, who will be servicing your loan, if there is a prepayment penalty, and who will you call if there is a problem. Some live to regret the “lowest rate possible loan” and return to their local financial institution for subsequent loans and refinancing.

Finally, a community banker never wants to foreclose on a property. Their objective is not to own real estate, but rather to find a common solution to whatever difficulties the borrow has. Sometimes that occurs through debt restructuring or an organized plan to sell the property, avoiding foreclosure. The goal is to find a solution.   

When looking for a home loan seek the advise and council of a local responsible lender who has ties to the community.  And, remember this twist on an old adage: If the offer looks too good to be true, it most likely is.