How to Recognize a Predatory Loan - PowerPoint PPT Presentation

About This Presentation
Title:

How to Recognize a Predatory Loan

Description:

Why does home ownership have such a revered place in our culture? ... sales and they won't be out the expenses that abandoned homes cause them. ... – PowerPoint PPT presentation

Number of Views:48
Avg rating:3.0/5.0
Slides: 28
Provided by: miamivalle
Category:

less

Transcript and Presenter's Notes

Title: How to Recognize a Predatory Loan


1
How to Recognize a Predatory Loan
  • Kimberly Kilby
  • Miami Valley Fair Housing Center, Inc.
  • www.mvfairhousing.com
  • www.dontriskyourhome.com

2
How to Recognize a Predatory Mortgage Loan
  • MVFHCs definition of a predatory loan
  • Any loan that is inappropriate for the borrower.

3
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.

4
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.

5
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.)

6
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.

7
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.

8
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?

9
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.

10
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.

11
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.

12
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.

13
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.

14
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.

15
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.

16
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.

17
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).

18
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.

19
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.

20
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.

21
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.

22
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.

23
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.

24
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.

25
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.

26
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.

27
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.
Write a Comment
User Comments (0)
About PowerShow.com