Friday, December 30, 2005

A Warning That Bears Repeating

As the home mortgage martket changes, it's once again important to stress that consumers educate themselves before sitting across the desk from a broker. There are predatory lenders out there looking to scam you.

The City of Los Angeles has had a good primer set up on its website for a few years. You can find it at this link. Here's a definition of predatory lending, as stated on the site:
Predatory lending includes home loan scams where a lender or contractor uses deception or fraud to take unfair advantage of a borrower's lack of understanding about loan terms, combined with excessive fees and very high interest rates, without regard to the borrower's ability to repay the loan.
Some signs include:
* Home loan offers over the phone, in the mail or in-person at your front door

* A contractor who says he can arrange financing for your home repair

* Pressure to sign loan documents immediately

* Pressure to sign loan documents with blanks in them

* You are not told the interest rate and the fees are not explained

* Interest rates that are far above current market rates

* Fees charged up-front without lowering the interest rate

* Costs and fees above normal

* Repayment schedules set up so that the monthly payment fails to pay off accrued interest and actually increases the original amount you borrowed

* Balloon payments--balance due on the mortgage must be paid at the end of the loan, usually 15 years. The balloon payment will be a huge sum of money, probably beyond your ability to pay. This may force you to borrow more money to pay back the loan

* Loans more than 100% "loan-to-value" may lock you into additional debt

* Credit life or credit accident and health insurance included as a condition of the loan. It increases the amount you owe.

* Loan contracts requiring mandatory, binding arbitration instead of the court system--lenders feel this forum will be more favorable to them and less favorable to the consumer

* Calls and letters asking you to refinance when you already did so in the last year or two
See the City of Los Angeles website for more information.

— The Boy in the Big Housing Bubble