How to protect yourself from predatory lenders.
The other day someone asked me what I thought was the biggest contributor to today’s mortgage mess. I thought about low interest rates, inflated home prices, Mortgage Company lenience, and subprime lending. It’s difficult to say that there was one root more responsible than another since they all played together in one big mortgage mess. However, if I must choose, subprime lenders get the most blame in my opinion. The main reason they get the blame is because of the ugly gremlins that spawned out of subprime lenders. These offenders are commonly referred to as predatory lenders. The situation has gotten so bad that there is legislation being discussed by congress. The intention is to curtail the many practices commonly described as predatory lending.
Predatory Lending
Predatory lending is typically described as a condition when the borrower is convinced to accept the terms of a loan that is unfair or abusive. These loans put the borrower at a high risk of default. The loan is usually bad for the unsuspecting borrower and will resort in foreclosure (in the case of mortgages) at some point in the near future. The lender is aware on certain conditions in the loan that he does not disclose, except in writing. The borrower has no idea that these conditions exist or even what they mean. Some such loans include adjustable rate mortgagees (ARM’S), payday loans, credit cards, and other instruments of credit. These loans are the vehicles that the lenders are using but not necessarily abusive in all cases. To a degree many lenders neglect to tell the borrower all the details of a loan but this practice is exaggerated when it comes to predatory lenders.
Predatory Mortgage Lenders
Predatory mortgage lenders may do the most damage to a consumer. These loans are collateralized by the house itself. In the case of a default, the lender can repossess the property and sell it later for a profit. According to the Association of Community Organizations for Reform (ACORN), these lenders target poor and minority borrowers that do not feel that loans are available to them otherwise. The statistics don’t lie. According to the Center for Responsible Lending, African Americans and other minorities are 31% to 34% more likely to receive higher rate subprime loans than whites, according to a 2006 study. These statistics were found to be true even when income and credit risk are equal to white borrowers.
How to protect yourself
Not all subprime loans are bad. They key is to understand the terms of the note. One rule of thumb when contemplating an ARM is affordability. If you cannot reasonably afford the payment of a 30 year fixed rate mortgage, then don’t purchase the home. Instead lower your expectations and choose a loess costly house. Trash the flyers that you receive through the mail that claim to have already pre-approved you for a loan or claim to come from your current mortgage company. Delete the emails, commonly referred to as “phishing scams”. These appear to come from your current bank or Mortgage Company but are actually scammers attempting to trick you into giving personal out information or applying for a mortgage. Most importantly understand how subprime loans are designed, locate a financial advisor, and be prepared for future changes in loan terms.
