How to Recognize a Predatory Loan

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How to Recognize a Predatory Loan

• Kimberly Kilby
• Miami Valley Fair Housing Center, Inc.
• www.mvfairhousing.com
• www.dontriskyourhome.com

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How to Recognize a Predatory Mortgage Loan

• MVFHCs definition of a predatory loan
• Any loan that is inappropriate for the borrower.

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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 thats 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 cant,
  that loan was inappropriate for them.

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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.

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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.)

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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.

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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 its a
  high cost loan and subject to HOEPA, but just
  being a HOEPA-covered loan is not a violation.

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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?

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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.

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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.

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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.

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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.

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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.

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Why do I say this?

• Its because, if your client is paying more for
  their property than its worth, the essential
  purpose of home ownership is not being fulfilled.
  

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Home Ownership The American Dream

• Thats what weve 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 familys largest
  source of wealth.
• We ALWAYS have to keep this in mind when were
  working with borrowers.

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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 Im concerned.
• Although the tax value may not be exactly the
  true market value of the property, weve found
  that its 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 wont have to pay for the
  appraisal and the lender finds it more reliable.

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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 Daytons
  Fannie Mae program).

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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.

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An affordable monthly payment

• Im 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.

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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.

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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.

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In this context, win-win solutions are possible.

• Because the people that were 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
  theyre 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 theyre owed.

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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.

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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 were 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.

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Crafting a win-win solution

• This is a win for our communities houses wont
  be sitting empty for months or years at a time,
  property values wont decline as a result of
  abandoned properties that are susceptible to
  criminal activity.
• This is a win for our local governments tax
  revenues wont decline because of the abandoned
  properties and foreclosure sales and they wont
  be out the expenses that abandoned homes cause
  them.

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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 its
  supposed to be for our clients they will begin
  the process of building their wealth as well as
  having pride in ownership.

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Miami Valley Fair Housing Centers 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 clients
  documents, we require that they
• Fill out a lengthy questionnaire regarding their
  loan,
• Gather all their loan closing documents as well
  as any correspondence they received from anyone
  in the loan process,
• Register and pay for 10 hours of financial
  management classes taught by our partnership
  agency, The HomeOwnership Center of Greater
  Dayton,
• 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.
• (If theyre 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.