Maybe you need extra cash to make much-needed repairs on your home. Or perhaps you’re facing unexpected medical bills, or need money for some other pressing reason.
The folks on the phone pitching home equity loans sound pretty convincing. You can get the cash to pay your bills, they say, just by taking advantage of the equity in your own home.
Many of these solicitations are legitimate, but some aren’t. So before you spring at the opportunity, ask yourself a few questions. Is refinancing with this company really necessary? It is worth courting potential financial disaster resulting from exorbitant interest rates and fees? Is it worth the possible loss of your home through foreclosure?
These very scenarios have played out for homeowners who failed to carefully comparison shop for home equity loans, and fell prey to those engaging in predatory lending practices.
Indeed, the number of foreclosures filed by subprime lenders against borrowers in the Chicago metropolitan area rose from 131 in 1993 to 4,958 in 1999, according to the National Training & Information Center, which is a Chicago-based training, research and resource organization for grassroots neighborhood groups across the country.
A home loan can be considered predatory on the basis of either the way it’s marketed or its terms, explains Bridget Small, senior program coordinator with AARP, formerly known as the American Association of Retired Persons, in Washington, D.C.
Predatory lenders market loans that take advantage of borrowers’ lack of experience, lack of knowledge or financial vulnerability. Loans offered by predatory lenders often include excessive fees or interest rates that aren’t justified by the borrowers’ credit histories. They may also include prepayment penalties or credit life insurance, which is insurance on the life of the borrower that protects the lender.
“A loan is predatory if it’s made without any regard as to whether the borrower can repay the loan,” Small said. “The borrower may have a great deal of equity in her home but be living on a modest income that can’t sustain the payment.”
At Chicago’s Woodstock Institute, a 27-year-old not-for-profit applied research and technical assistance institution that deals with issues of fair lending, senior vice president Dan Immergluck reports having seen many cases in the last three years of homeowners being convinced to take mortgages that resulted in monthly payments that were 75 percent of their monthly incomes. In some cases, the payments were actually greater than the borrowers’ monthly incomes.
“That’s well beyond the realm of responsible lending,” he said. “A responsible lender would tend not to make a loan with a mortgage more than 45 percent of monthly income.”
Most often, predatory lending occurs when borrowers take subprime loans, which are frequently the only option for those with blemished credit, according to Small. Despite their name, subprime loans carry higher interest rates than standard loans.
Not all subprime loans are predatory, and they can be a good means of helping those with checkered credit histories reestablish themselves in the credit marketplace, she said. In some cases of predatory lending, mortgage payments start out low but skyrocket after the first few months. One lender, First Alliance Mortgage of Irvine, Calif., which shut down after writing some 1,500 mortgages in Illinois and as many as 35,000 nationwide, wooed homeowners by including teaser rates that appeared to be competitive, said Tom James, assistant attorney general in the Illinois attorney general’s Consumer Fraud Bureau.
The loans were structured so that every six months, interest rates went up a point, James said. Some mortgages rose 80 percent within three years, resulting in the mortgage holders being vulnerable to “flipping,” a practice in which First Alliance would refinance them repeatedly.
While anyone can fall victim to predatory home loans, older people are particularly vulnerable. Approximately two-thirds of all Americans now own homes, an all-time high, Small said. But among seniors that number stands at approximately 80 percent.
Half of those older than 65 hold most of their incomes in their homes, and they’re also more likely to be living in older homes requiring greater maintenance and repair.
That’s significant because a substantial percentage of predatory home lending is first presented to the borrower as an opportunity for home repair, Small said. When the borrower responds that she doesn’t have enough money to fix the roof or replace the windows, she’s told the home improvement company can refinance her home to give her the money needed.
“Most of the money they have is in that home,” Small added. “If they face unexpected medical costs, or if a spouse dies and they experience a loss of income, the home is a ready asset. It may seem to be the logical thing to do to leverage that home equity.”
Moreover, those with substantial home equity are increasingly finding themselves inundated with solicitations through the mail, phone and sometimes door-to-door. “Each solicitation isn’t an attempt to take advantage of you,” Small said. “But with each solicitation, it may become more familiar and attractive.”
Not only are the solicitations coming more frequently, but they’re backed by slick research and strategy, said Ira Rheingold, supervising attorney for the Legal Assistance Foundation of Metropolitan Chicago. “The come-on is very sophisticated,” he said.
“They know whom they’re selling to … and also have information on whom they’re calling. They can go to a credit reporting agency and say, `I want a list of all people in this ZIP code who own their own homes and have outstanding medical debt.’ If you’ve got equity, they want to target you, because there’s money to be made there. It’s a cash register.”
It’s important for those receiving solicitations, particularly older people and low-income individuals, to recognize that they have alternatives to predatory loans, such as reverse mortgages, which allow senior citizens to convert home equity into income.
Another option for some is the Emergency Housing Assistance Program of Chicago’s Department of Housing, which can make emergency loans for home repairs and weatherization available to homeowners who qualify for assistance, Rheingold said.
“The other thing I advise people to do is if they need work done, go to their bank,” he added. “If there’s a problem with credit, try to find out what it is and how to repair the credit.”
If you do decide to take out a home loan, keep these tips in mind:
– Avoid dealing with door-to-door home improvement contractors. Instead, get referrals from friends and family members to reputable contractors and arrange financing yourself.
– Obtain your credit score from your lender. This can protect you from being sold on subprime loans if your creditworthiness merits a standard loan.
– Shop at least three different lenders, and demand accurate written information about upfront costs, interest rate and the terms of the loan.
Immergluck recommends that before they take out home loans, homeowners make sure all lender or broker fees are less than 2 percent. If they’re subprime borrowers, they may have to tolerate higher interest rates, but that’s generally preferable to paying excessive fees upfront. However, he added, “you should always shop for the lowest interest rates.”
He also urges borrowers to do something almost everyone does when buying a home, but too few think of doing when refinancing: Get a lawyer.
“You’re not going to get a panacea with an attorney,” he added. “But it can put the lender on guard.”
Also keep in mind that the Truth in Lending Act allows borrowers to cancel loans on their homes within three business days of signing, according to the AARP.
A number of organizations, including the AARP and the Woodstock Institute, are working to educate the public about predatory lending practices, and are pushing for improved legislation at the state and federal levels.
Illinois Gov. George Ryan has proposed a set of regulations to help the state clamp down on predatory practices, Immergluck noted. After a comment period, the regulations will be up for approval by a committee of the General Assembly.
“We’re optimistic right now,” Immergluck said. “We’re hoping the legislative committee stands firm against lobbying pressures.”
