While Ken Lay and the folks at Enron may be the biggest money-grubbers of all time, the people who make loans for people to purchase a home or refinance their mortgage are no amateurs when it comes to beating people out of their money – and, all too often, their homes.
It’s called “predatory lending,” which the Association of Community Organizations for Reform Now (ACORN) has defined as “imposing unfair and abusive loan terms on borrowers, often through aggressive sales tactics, taking advantage of borrowers’ lack of understanding of extremely complicated transactions, and outright deception.”
ACORN went on to say: “The damage done is increased by the fact that predatory loans are made in such concentrated volume in poor and minority neighborhoods where better loans are not readily available and the loss of equity and foreclosure can devastate already fragile communities.”
ACORN released a nationwide study of the predatory lending practices of 7,800 financial institutions on Nov. 14, 2001.
ACORN said predatory loans “do tremendous damage both to individual borrowers and their families. They rob borrowers of the equity in their homes and their peace of mind as they struggle to pay unaffordable mortgages or face the loss of their homes, and in the worst cases lead to forced sales or to foreclosure. The threat is particularly serious if we consider the fact that for most Americans the equity in their homes represents the majority of their lifetime’s accumulated wealth.”
The ACORN study also shows the sharp racist edge of the home mortgage business, with African Americans, Latinos and other nationally oppressed minorities the particular victims of subprime lenders. According to ACORN, African Americans accounted for 40.5 percent of all refinance loans made in the District of Columbia, 26.4 percent of such loans went to Latino homeowners, while just 9.3 percent of these loans were made to white homeowners.
For the nation as a whole, African American home buyers were four times more likely than white home buyers to receive a subprime loan and Latinos were twice as likely. Although poor white homeowners are targeted by predatory lenders, the number of subprime refinance loans to minorities continues to grow at a rate much faster than for whites.
ACORN adds and the rate of growth of subprime lending has been much faster than the rate of growth of prime lending, especially to African American borrowers.
The predators have worked long and hard to develop schemes meant to enhance their bottom line. Among them is the practice of rolling excessive fees – generally a hair under 8 percent – into the loan, thus adding even more interest to the amount to be repaid. Fees of 8 percent or more trigger federal regulations that require additional disclosure to borrowers.
Another stock-in-trade is to push borrowers into higher risk categories – and thereby higher interest rates – than a borrower’s credit warrants. ACORN concluded that “borrowers with perfect credit are regularly charged interest rates 3 to 6 points higher than the market rates; with some subprime lenders, there simply is no lower rate, no matter how good the
credit.”
Many subprime, predatory lenders make loans with the full knowledge – and, indeed, intent – that ultimately the homeowner will not be able to make the monthly payments, the lender will foreclose on the property and resell the family home to some other unsuspecting person and the cycle will begin all over again.
One of the devices favored by lenders is the “balloon payment” – the requirement that after a certain number of years (usually between five and seven), the borrower must pay off the outstanding balance of the loan. But, as anyone who has ever bought a house or refinanced a mortgage knows, it takes more than 20 years before half of the monthly payment on a 30-year mortgage is applied to principle.
The buyer makes regular (often high) mortgage payments for years and suddenly must refinance to pay off the existing loan. Once again, the cycle repeats itself, for often these homeowners have no alternative but to begin anew with another subprime, predatory loan.
Although balloon payments per se are not an evil practice, for most borrowers caught in the subprime loan trap they are, as the ACORN report said, they are “extremely harmful. Balloon mortgages, especially when combined with high interest rates, make it more difficult for borrowers to build equity in their home.”
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