SEATTLE AVENUE

I was warned about this two years ago, sitting in an uncomfortable chair in a chilly meeting room in Kent. I needed continuing education hours to renew my real estate license so I took a $10 class by a highly-recommended Stewart Title officer. During the class our instructor described a road map of what we’d be coming up on two to five years down the road. Two years later, right on schedule, his prophesy has manifested into reality. He told us, “Position yourself NOW to be working with a flood of short sales and foreclosures in the next two to five years.” WOW!

Homeowners are losing their homes to foreclosure in record numbers due in large part to the creative mortgage products, subprime loans, and predatory lending.

Predatory lending practices often exploit lower-income and minority borrowers living in neighborhoods where traditional banking services continue to be in short supply. These people tend to turn to subprime lenders regardless of whether they would qualify for less expensive loans.

Subprime loans are three times more likely in low-income neighborhoods than in high-income neighborhoods. In predominately black neighborhoods subprime lending accounted for 51% of refinanced loans in 1998 compared with only 9% in predominately white neighborhoods. Significantly, these disparities still existed when borrowers in black and white neighborhoods were compared while controlling for the income levels of the neighborhood.

In particular, elderly homeowners are frequent targets of subprime home equity lenders because they often have substantial equity in their homes yet have declining or fixed incomes. While subprime lenders may expand access to credit for individuals who otherwise would be shut out of the market, unethical lenders take advantage of consumers in the weakest bargaining position.

Predatory lending in the subprime mortgage market covers a wide range of practices. While the practices are varied there are common traits to look for. They generally aim either to extract excessive fees and costs from the borrower or to obtain outright the equity in a borrower’s home. This is often accomplished through a combination of aggressive marketing, high-pressure sales tactics, and loan terms such as prepayment penalties that inhibit a borrower’s ability to go elsewhere for credit.

Borrowers with higher-interest subprime loans have a strong incentive to refinance as soon as their credit improves. However, up to 80% of all subprime mortgages carry a prepayment penalty.

Typically, an abusive prepayment penalty is effective more than three years and/or costs more than six months’ interest. In the prime market, only about 2% of home loans carry prepayment penalties of any length.

A predatory loan is a dishonest loan. Predatory loans harm borrowers by making it difficult or impossible to keep up with payments. Borrowers may pay unnecessary fees and excessive interest charges and if they miss their payment they risk losing their home.

Predatory lenders prey on people who are unfamiliar with the banking system. They target seniors, minorities, and anyone whose credit makes it hard to get a regular bank loan.

Loans from predatory lenders take advantage of borrowers with a variety of abusive practices:

• They target people of color
• They target elderly and disabled people for high-cost loans
• They charge excessive interest rates and higher fees
• They keep secret the true costs and terms of the loan
• They approve a loan without considering a person’s ability to repay
• They convince borrowers to refinance frequently (or flip) the loan
• They and carry terms that make it difficult for the borrower to refinance later

Danger signs of a predatory loan:

• Total bank fees greater than 2%
• Balloon payments
• Prepayment penalties
• The loan is based on home equity rather than the borrower’s income
• Credit life insurance added to the loan

Beware — points and fees are costs not directly reflected in interest rates. Because these costs can be financed, they’re easy o disguise or downplay. On competitive loans, fees below 1% of the loan are typical. On predatory loans, fees totaling more than 5% of the loan amount are common.

Predatory mortgage lending drains wealth from families, destroys the benefits of homeownership, and often leads to foreclosure. The Center For Responsible Lending (a resource for predatory lending opponents) estimates that predatory mortgage lending costs Americans more than $9.1 billion each year.