Oh dear, another of those boring corporate scandals that only accountants and The Wall Street Journal understands or cares about. Well, not exactly!
In the first place, mortgage fraud is hardly boring. Organized crime is often
involved, and even petty criminals pull off some pretty amazing coups. And while
accountants and the business media have a vested interest, so do bank regulators,
community groups, and secondary market investors.
And so should you! While financial institutions and the federal government are by far the biggest victims in terms of monitory loss, mortgage fraud is not just �their problem�
Illegal activities aimed at your community bank or big nationwide lenders eventually and inevitably lead to higher loan costs and more restrictive lending practices. If widespread in one area, these scams can result in an epidemic of foreclosures and abandoned properties. A concentration of these can destroy neighborhood property values and damage the lifestyle of hardworking and responsible residents. Frauds that target federally guaranteed loan programs will � let�s all speak in unison here � lead to higher taxes.
Mortgage related fraud against financial institutions is a complex topic which we will discuss later. Some of these schemes are intricate and clever enough for a crime novel; consumers, especially gullible and/or greedy ones, are often caught up in them; and many are fascinating from the standpoint of how far the unscrupulous will go to make a dishonest buck and how often their victims seem eager to help them do it.
But first we will take a look the victimization of individual consumers by fraudulent and predatory lending practices. At best, these practices are annoying to potential victims, but for the actual victims the end result is the loss of a home, financial devastation, and destruction of hard-won credit ratings.
Over the next few days and weeks we will describe some of the scams that target home buyers and those refinancing existing property. We will discuss some actual cases, alert you to warning signs and suggest some ways to protect yourself and where to go if it is too late for that.
Predatory Lending Practices
What is Predatory Lending? Predatory lending is the term used to characterize the usually fraudulent but always unfair and deceptive mortgage practices directed at consumers. Homeowners seeking to refinance are the most common targets, but home purchasers are not immune. At particular risk in the latter category are buyers who, because of credit problems or self-employment income, may not qualify for a conventional Fanny Mae/Freddie Mac mortgage and must rely on a sub-prime lender (one who, for a price, is willing to assume a higher risk than conventional lenders) to purchase or refinance. Also at risk, not surprisingly, are those seeking to buy in neighborhoods that have been red-lined (i.e. discriminated against) by conventional lenders. These are almost universally low income and usually minority neighborhoods, often in need of a substantial upgrade in housing stock. Buyers in these areas are, therefore, by default, placed at the mercy of sub-prime lenders.
But, beyond sub-prime lenders, there are a startling variety of people involved in fraudulent and predatory practices � big banks, the kind with their names on NASCAR billboards, loan servicing companies, small time con artists who once peddled aluminum siding and water filtration systems, loan originators working for otherwise legitimate firms, real estate attorneys, home builders, real estate agents. Predatory lending is profitable, and the opportunists have come out of the woodwork.
Oh, and watch out for Uncle Ed.
We present here our own list of predatory practices and the tactics that are
used to promote them. We haven�t yet totaled up the number on our list,
mainly because they keep popping up as fast as we can write them up. Nor have
we tried to categorize them by target, method, or intent. But here are the first
few of our top ten, or maybe twenty, in no particular order.
1. Aggressive solicitation by lenders. Predatory lenders are pushy in their approach to borrowers. Their ability to telemarket has been curtailed by the Federal Communication Commission�s �No Call� rule, but they have the Internet, door-to-door salespeople, the U.S. Mail, flyers dropped on doorsteps or in mailboxes. The pitches are strikingly similar no matter who delivers them:
- We can lower your monthly mortgage payments
- We will save you hundreds each month by consolidating your credit card and other payments
- You can use your equity to buy that new (car, boat, kitchen, dream vacation - take your pick)
- You can save your home from foreclosure; refinance your way out of bankruptcy.
And they don�t take no for an answer. If you don�t like one approach, they will try another. They insinuate themselves into your life, become a friend to the lonely, (making them particularly dangerous to the elderly who often have substantial equity in their homes.) One Internet lender sends me a minimum of three emails per day. When I �unsubscribe� they start up again, within the week, with a different email address
2. Home improvement scams. This practice is a favorite topic of �gotcha� journalists, as well it should be. But, they expose it in 1998 then forget about it until 2004. In the interim, millions of people are victimized.
The classic operation is a team thing. A homeowner needs a new roof or structural repairs, and approaches a contractor. Or maybe he has a long-held dream, a second bath or a new kitchen. Often he isn�t shopping, just dreaming. Then the doorbell rings. A contractor �working in the neighborhood� has equipment already on site and can offer a deal on any project. AND, his company can finance it (the paper will then be sold to a predatory lender) or he has a �friend� in the mortgage business who has a spiffy new home improvement program.
Snap goes the trap. The homeowner agrees, the papers are signed; the work begins immediately, often before the three day loan cancellation right ends. The work is overpriced, shoddy, and often done without proper permits that would require inspection by the local building inspector.
Of course, the double whammy comes with the loan. It will be a poster child for predatory lending, with a high interest rate, burdensome fees, and most likely a pre-payment penalty that locks the borrower in for an extended period of financial torture.
Homeowners who have been impacted by these dreadful seasons of hurricanes, tornados, and forest fires should pay particular attention to these home improvement scams. The teams are probably in your neighborhoods, even as you read this.
We have only just begun. This series will continue with information on other types of predatory loan practices, advice on how to protect your home and pocketbook from the scammers, and where to seek help if it is too late for that.