How to Recognize
a Predatory Loan
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Kimberly Kilby
Miami Valley Fair Housing Center, Inc.
www.mvfairhousing.com
www.dontriskyourhome.com
How to Recognize a Predatory
Mortgage Loan:
MVFHC’s definition of a predatory loan:
Any loan that is inappropriate for the borrower.
A Predatory Loan could be:
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If the borrower is in foreclosure or has missed a
payment or is struggling to make payments because
of how inappropriately high the payments are, then
that’s a predatory loan.
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Unless there was an unforeseen life event, like a job
loss, major health problem, divorce or death of a
spouse, borrowers should always be able to afford
the loan they are given. If they can’t, that loan was
inappropriate for them.
A predatory loan could consist of:
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If the borrower has a 2/28 ARM, and that
borrower is not reasonably expecting to have
a significant increase in income within the
next 2 years, or planning on moving, that
loan is inappropriate for the borrower and is
a predatory loan.
A predatory loan could consist of:
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If the borrower was lied to about any material
(i.e., important) term of the loan, that is a
predatory loan.
(Examples: interest rate, monthly payment
amount, payment amount included amounts
for taxes and insurance, fixed vs. adjustable
rate, they would be refinanced in a year.)
A predatory loan could consist of:
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the borrower was loaned more
money than their house is worth,
that is a predatory loan.
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This traps the borrower in that loan, because
they will be unable to refinance or sell and
they will not have equity.
A predatory loan could consist of:
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If the borrower was charged excessive
closing costs.
Unfortunately, there is no maximum amount
set in this regard.
If a loan has points and fees that are 8.0% or
more of the total loan amount, that means it’s
a high cost loan and subject to HOEPA, but
just being a HOEPA-covered loan is not a
violation.
A predatory loan could consist of:
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If the borrower was not provided with the disclosures
required by the Truth in Lending Act, or was provided
with inaccurate disclosures.
Very complicated analysis, but easy things to check
for are:
Did they get a Truth in Lending disclosure form?
Did they receive 2 copies of the Notice of Right to
Cancel per person with an ownership interest?
Were the dates filled in correctly on the NORTC?
A predatory loan could consist of:
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If you look at a loan and it is out of line with
other loans that you have seen, there very
well may be something predatory about that
loan. “You know it when you see it.”
This can include: high interest rates,
interest-only loans, balloon loans, credit
insurance, etc.
Other things to look for:
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Who was the prior lender and what was the
payoff amount of that loan?
When was that loan closed and what was the
original principal balance amount, versus the
amount that was paid off.
Other things to look for:
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What other debt was paid off?:
Refinancing to pay off unsecured debt, including
credit card debt or car loans or student loans is a
very risky proposition, putting the home at risk, and a
borrower should only do this with counseling
beforehand so they have a full understanding of the
ramifications.
If the purpose of the refi was to pay off unsecured
debt, probably another loan product, like a HELOC,
would have been a more appropriate product.
Other things to look for:
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Was a Yield Spread Premium (YSP) or any type of fee paid by
the lender to the mortgage broker?
If it was, look to see what other fees the mortgage broker was
paid. If the mb was paid other, significant fees, this can raise a
legal claim of unconscionability and a RESPA violation.
There are many lenders who pay mortgage brokers a fee to
bring them a borrower who is agreeing to pay an interest rate
higher than the borrower qualifies for.
This fact is not disclosed to the borrower, or is disclosed at
closing in a very perfunctory way or in the stack of loan
documents that the borrower is given at closing to sign. I think
this is predatory.
But: regardless of whether the loan
was predatory or not, the single most
important thing to consider is:
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WHEN HELPING CLIENTS IN
FORECLOSURE, DEFAULT, OR DANGER
OF DEFAULT, IF YOU ARE NOT LOOKING
AT THE MARKET VALUE OF THE
PROPERTY AND SO ARE HAVING THEM
AGREE TO WORKOUTS OR LOAN MODS
OR REFIS THAT ARE MORE THAN THE
VALUE OF THEIR PROPERTY, YOU ARE
NOT HELPING THEM.
Why do I say this?
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It’s because, if your client is paying more for
their property than it’s worth, the essential
purpose of home ownership is not being
fulfilled.
Home Ownership = The American Dream
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That’s what we’ve all been told. Why does home
ownership have such a revered place in our culture?
Having something that is your own is part of it, but:
A home is a financial investment: for most people,
their home will be their family’s largest source of
wealth.
We ALWAYS have to keep this in mind when we’re
working with borrowers.
Look at the market value of the home
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How do you know what the value of the property is?:
Look at the tax value. My rule of thumb is that the
loan has to be over $10,000 higher than the value of
the property before I’m concerned.
Although the tax value may not be exactly the true
market value of the property, we’ve found that it’s
usually within 110% (meaning, only 10% low).
If the lender is not willing to accept the tax value,
invite them to hire an appraiser to do an appraisal.
This way, your client won’t have to pay for the
appraisal and the lender finds it more reliable.
Goal when working with a borrower in
foreclosure = appropriate loan
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Appropriate loan = loan based on the market value
of the property, also taking into consideration the
borrowers’ income and other debts so that the
monthly payment is an amount that they can afford.
Ways to get client an appropriate loan: 1. Loan
modification with the existing lender with a new
principal balance, interest rate and/or loan term; or
2. New loan with a different lender (will probably
have to use something like Dayton’s Fannie Mae
program).
If the client is not able to afford a
payment on an appropriate loan:
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Get a roommate
Sell the home through a short sale
Negotiate a deed in lieu of foreclosure,
where they give the house back to the lender
Note: with both short sale and DIL, the
lender will give the client money for moving
and a reasonable amount of time (usually 3
months) to vacate the property.
An affordable monthly payment:
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I’m not talking about a monthly payment
amount that the borrower could qualify for,
because that is an unrealistic amount that is
not going to be affordable and is going to
lead the client back into foreclosure.
Our goal is to create sustainable home
ownership for our clients, and performing
loans for the lenders.
When the loan is for more than the
house is worth:
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This is the scenario that I see in at least 90% of our cases.
Most of the time, this occurs when there was a mortgage broker
involved in the loan origination.
There are a lot of unscrupulous mortgage brokers out there,
who get paid a percentage of the loan amount, so the higher
the loan amount, the more they get paid. They work in
conjunction with appraisers who will give them any number they
want as far as the value of the property, because otherwise
those appraisers will never get any work again from that
mortgage broker, so that the appraised value of the house
comes back much, much higher than what it actually is.
When the loan is for more than the
house is worth:
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In this situation, the lender is also a victim,
because they were defrauded by the
mortgage broker and appraiser regarding the
true value of the property being used to
secure the loan.
In this context, win-win solutions are
possible.
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Because the people that we’re talking about are either already
in foreclosure, default, or about to default:
Here is the position that the lender is in: if things proceed as
they are now, the lender has to pay the costs and expenses
associated with a foreclosure: they have to pay their atty, they
have to pay court costs, they may be paying taxes and
insurance on the property and they have the lost time value of
money for the entire time that they’re not receiving any money.
After all those expenses, if the lender proceeds with the
foreclosure and wins, what they get is the property, which
again, is most likely not worth what they’re owed.
Crafting a win-win solution:
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In all but the most extreme circumstances, the
borrowers can afford to pay a monthly payment on
an appropriate loan
Again, an Appropriate Loan = loan based on the
market value of the property, also taking into
consideration the borrowers’ income and other debts
so that the monthly payment is an amount that they
can afford.
An appropriate loan should have a fixed, reasonable
interest rate over a reasonable amount of time.
Crafting a win-win solution:
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This is a win for the lender because we are minimizing the
amount of money that they are going to lose. The lender is
going to lose money in a foreclosure, so what we’re trying to do
is minimize that loss.
If they do a loan mod, they get a performing loan and start
earning interest. If they accept a short payoff, they get a lump
sum, quickly.
This is a win for the home owner because they get to stay in
their home, paying a reasonable amount for the property, at a
monthly amount that they can afford, so they have sustainable
home ownership.
Crafting a win-win solution:
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This is a win for our communities: houses won’t be
sitting empty for months or years at a time, property
values won’t decline as a result of abandoned
properties that are susceptible to criminal activity.
This is a win for our local governments: tax
revenues won’t decline because of the abandoned
properties and foreclosure sales and they won’t be
out the expenses that abandoned homes cause
them.
Crafting a win-win solution:
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This is a win for the American Dream:
helping to create sustainable home
ownership
The home will be the investment that it’s
supposed to be for our clients: they will begin
the process of building their wealth as well as
having pride in ownership.
Miami Valley Fair Housing Center’s
Predatory Lending Solutions Program:
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Our program is set up so that we are only expending our limited time and
resources on clients who really have a commitment to saving their home and
are willing to do the work necessary to reach that goal.
Before we even begin looking at a client’s documents, we require that they:
Fill out a lengthy questionnaire regarding their loan,
Gather all their loan closing documents as well as any correspondence they
received from anyone in the loan process,
Register and pay for 10 hours of financial management classes taught by our
partnership agency, The HomeOwnership Center of Greater Dayton,
Agree to attend a one-on-one counseling session with an HOC counselor
where their credit report is pulled and reviewed and a detailed, monthly budget
is prepared.
(If they’re not currently paying on their mortgage) Start depositing a reasonable
amount into our trust account so that they remain in the habit of making a
monthly mortgage payment.