Misleading Mortgages and Predatory Lending
Getting your first (or even your second or third) mortgage can be really stressful and confusing. There’s a lot of technical information to absorb in a very small window of time and sometimes that means you’ll miss some of the details. Most of the time, your banker will be happy to fill in the blanks for you, but what do you do if you have a lender who doesn’t have your best interest in mind?
Welcome to every buyer’s worst nightmare: a misleading mortgage and a predatory lender.
What Kind of Mortgages are “Misleading” or “Predatory?”
Although what’s “misleading” and “predatory” to one person may be fair and equitable to another, when it comes to mortgages there are some specific guidelines to go by. Freddie Mac, for example, officially considers the following practices to be “predatory:”
Charging excessive fees. Sure, some loans have higher fees than others, but when your lender charges far more than the market average, it’s taking advantage of you.
Encouraging refinancing for small gains. This practice, known as “equity stripping,” starts when your lender contacts you to let you know that your interest rates could be lower. “Hooray!” you cry, and call the number, tick the box, etc. Unfortunately, all the equity you’ve built up so far ends up disappearing as points and fees mount. But hey, you have a lower rate, right? A few years later, the same lender pulls the same trick, keeping you in a position where you have almost no equity.
Not reporting your credit information in part or whole. This isn’t cool. You can’t get the best rates if the lenders looking at your credit file don’t get the whole picture.
Pushing costly loans on quality buyers. It’s not a contest, but some buyers can get better loans than others. When that highly-qualified segment is being pushed into subprime-type mortgages, something is very wrong. If this is you, run. Run now. Run away.
“Misleading”: is less well-defined, but you can assume any promises that sound too good to be true probably are. You’re relying on your mortgage broker or banker to steer you in the right direction when they’re doing things that are only benefiting themselves it’s just a disaster waiting to happen.
Misleading mortgages may imply that you’ll have a really low interest rate for a long time, that you don’t have to make payments until a certain time, or that you don’t have to pay any fees at all for the loan (well, sure, since you financed all that into my loan). There’s no free lunch, don’t let anyone tell you otherwise. If you can’t take the loan docs home to read in full before signing them, just walk out. There’s something fishy there.
Protecting Yourself from Mortgage Scams
Some of these loans exist in a weird, sticky world. Just because a particular loan is a terrible idea for anyone to agree to, that doesn’t necessarily make it a mortgage scam. At the same time, a fishy mortgage isn’t necessarily mortgage fraud. A lot of it hinges on how the loan officer is behaving.
Ask yourself who stands to benefit from the mortgage this person is selling. Your banker should always place you and your success at paying off the loan first.
If you’re concerned that a loan you’ve been offered may be predatory, run through this list:
Call your Realtor. Assuming you trust your agent, they can be a great first stop for advice on the mortgage you’ve been offered. They see lots of loans and are intimately familiar with the terms that local banks prefer, depending on your credit status. They also can connect with their network to check the reputation of the lender in question.
Consult with a real estate attorney. They’re not as familiar with current market conditions, but a real estate attorney can look at the contract and help you better understand what you’re going to be on the hook for, should you agree to the terms.
Get a second opinion. Even if you skip the first two, do not leave this one behind. Call another bank, call 10 other banks, or touch base with us here at Home.Loans to see what other products or programs may be a good fit for you. As long as you limit your credit inquiries to a 14-day window, your multiple loan applications will count as a single incident in your file.
The currently-threatened Dodd-Frank bill has a variety of protections against predatory lending built in to protect borrowers from “high cost mortgages” and other predatory practices. Unfortunately, this may not be enough to keep you safe from these loans. Until it’s clear what, if any, consumer protections will remain in place, do what you can to be offensive. Getting several loan offers from different lenders if you feel that you may be walking into trouble is one of the very best tactics.