How to Recognize a Predatory Loan Kimberly Kilby Miami Valley Fair Housing Center, Inc.

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: 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. 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: 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: 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: If the borrower was loaned more money than their house is worth, that is a predatory loan. 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: 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: 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: 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: 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: 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: 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: 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? 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 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 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 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: 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: 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: 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: 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. 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: 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: 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: 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: 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: 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: 1. Fill out a lengthy questionnaire regarding their loan, 2. Gather all their loan closing documents as well as any correspondence they received from anyone in the loan process, 3. Register and pay for 10 hours of financial management classes taught by our partnership agency, The HomeOwnership Center of Greater Dayton, 4. 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. 5. (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.