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FinalCall.com News
Business & Money
The Predatory Mortgage Cancer
By Michael G. Shinn, CFP
-Guest Columnist-
Updated Jun 15, 2007 - 10:27:00 PM
Your money really matters:
Predatory mortgage lenders are a cancer in our community and our country. Drive around streets in the city or inner ring suburbs, and you will instantly be struck by the number of abandoned and boarded up homes. The vast majority of these properties are distressed because they are in mortgage foreclosure. The last owner simply could not afford the mortgage and since they had little or no equity in the property, their only choice was to abandon it.
The predatory mortgage cancer has spread to Wall Street. On Mar. 12, the Dow Jones Industrial Average plunged 240 points. One of the primary reasons given for the drop was the fact the number two subprime mortgage lender, New Century Financial, was nearly insolvent and close to bankruptcy. New Century’s problems created a chain reaction in broader financial markets. According to a March 12, 2007, Bloomberg News Report, “Bad U.S. subprime mortgages are at a seven-year high, forcing more than two dozen lenders to close or sell operations. Their woes may contribute to more than 1.5 million Americans losing their homes and 100,000 people losing their jobs.”
What is predatory mortgage lending?
Predatory lending generally occurs in what is called the subprime mortgage market. Typically, subprime loans are made to individuals with low credit scores and poor credit histories. For the lender, the subprime loan is riskier and commands higher interest rates and loan fees than those offered to standard risk borrowers. Subprime loans are extended primarily by finance companies that are not subject to the same regulations as banks and savings and loan associations.
Subprime lending in and of itself is not bad. Lenders deserve higher returns for the risks inherent in lending to lower credit rated individuals. However, subprime lending turns into a predatory cancer when outright fraud and deception is committed; when exorbitant fees and interest rates are charged; when lending standards are not enforced, and when unaffordable loans are granted.
How to avoid predatory lenders
If you are considering a new mortgage loan or refinancing an existing one, there are several steps you can take to avoid the pitfalls of predatory lending:
• Be wary of the high-pressure sale—Never be talked into borrowing more money than you need, falsifying a loan application, signing a blank form or signing something you don’t understand.
• Comparison shop—Approach a variety of lenders, including banks, credit unions, savings and loans and mortgage companies. Compare rates, closing costs and loan terms. Don’t be timid about negotiating.
• Keep good records—Keep copies of all signed documents, statements and cancelled checks. Keep notes of your conversations with lenders.
• Check your budget—Make sure you can afford the monthly loan payment along with your other monthly expenses.
• Seek professional advice—Discuss the loan with your attorney, financial advisor and a counselor at a non-profit credit or housing counseling agency, or someone you trust.
• Know your rights—The Truth in Lending Act provides most borrowers three-business days to cancel a loan arrangement. Additionally, if you want to file a complaint, contact the Federal trade Commission at 877-FTC-HELP.
Predatory mortgage lending condemns the unwitting homeowner to a vicious cycle of refinancing, bad credit and potential bankruptcy. When concentrated in a community, predatory mortgage lending practices can lead to vacant properties, deteriorating neighborhoods and community destabilization. Be a wise shopper and don’t become a victim of a predatory lender.
(Michael G. Shinn, CFP, Registered Representative and Investment Adviser Representative of and securities offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or to send your comments or questions to [email protected].)
