Targeting Minorities and the Elderly
Targeting Minorities and the ElderlyBy E. Roberts Musser –
Extending mortgage credit on unfair terms is a form of predatory lending. Major indicators of predatory mortgage lending are:
- excessive fees;
- prepayment penalties;
- inflated interest rates;
- exploding adjustable interest rates;
- negative amortization;
- promise of future refinance to address future increases;
- refinancing to pay off unsecured debt;
- repeated refinances (“flipping”);
- credit insurance and other additional products;
- steering and targeting.
As an example of how sophisticated predatory lending has become, a description of one type of mortgage product will suffice – payment option adjustable rate mortgages (payment option – ARMs). According to the Federal Reserve Board, the payment-option ARM is an adjustable-rate mortgage allowing the consumer to choose among several payment options each month as follows:
- Payment options
- Such options typically include:
- principal and interest on a set loan payment schedule of 15, 30, or 40 years;
- an interest-only payment;
- a minimum payment less than the interest-only payment.
- Interest rate:
The interest rate on a payment-option ARM is typically very low for the first few months, then rises. Monthly payments during the first year are based on the initial low “teaser” rate. If the consumer only makes the minimum payment, it may not cover the interest due. The unpaid interest is added to the amount owed on the mortgage, resulting in a higher balance (negative amortization). As interest rates go up, so will monthly payments.
- Payment changes – Payment-option ARMs cap (limit) the amount the monthly minimum payment may increase from year to year, even if interest rates rise above the cap. But any interest not paid because of the payment cap will be added to the balance of the loan.
- Recalculation period –
Payment-option ARMs have a built-in recalculation period, usually every 5 years. The payment will be recalculated (recast) based on the remaining term of the loan. If it is a 30-year loan and it is at the end of year 5, the payment will be recalculated for the remaining 25 years. However, the payment cap does not apply to the adjustment. If the loan balance has increased, or if interest rates have risen faster than the payments, monthly payments could greatly increase.
- Ending the option payments – Lenders end option payments if the amount of principal owed grows beyond a set percentage of the original mortgage amount, e.g. 125%. The loan would then be recalculated (recast) and the consumer would pay back principal and interest based on the remaining term of the loan. It is likely that payments would go up significantly, with no option to pay a lesser amount.
Confused? You should be. As one website (www.mortgage-x.com) noted, payment option ARMs “are right for you if you’d like to own your property only for a short time, and prefer affordability and flexibility in your monthly payment. However, if you select the minimum payment option in the early years, you should be prepared for … payment shock in your monthly payments thereafter.” In other words, payment option ARMs were designed for an experienced investor, not for the average consumer who only wants to purchase a single home to live in for a very long time. Yet targeted for these complicated mortgage products were the elderly and minorities – often the poor, the ingenuous, the vulnerable.
I saw this myself in my own law practice. One distressed couple came to me, their house purchased 3 years prior and now “underwater” (a homeowner owes more on the mortgage than the house is worth at fair market value). They could see no way to get out from under their debt. As the husband sadly said to me, “I should have known the terms of the mortgage loan were too good to be true no matter what the bank said”. But as I explained it to them, the lending institution was essentially “hiding the ball”, not revealing the real consequences of the seriously misleading terms in its complex paperwork.
Except it is far worse than that. Banks actually targeted the uninitiated, often talking the elderly and minorities into purchasing more expensive loans, even though these trusting consumers may have qualified for a cheaper fixed rate mortgage. Or the naïve were conned into refinancing their unsecured debt – by having it transformed into collateralized debt with an offer of a low “teaser” rate. In another instance, an elderly couple came to me with an extreme tail of woe. A bank had talked them into putting their house up for collateral to pay off an unsecured debt – an unsecured debt that could have been written off in a simple bankruptcy proceeding. The distressed pair were going to lose their house the two had lived in for over 30 years, which need not have happened.
I learned of another elderly consumer who was so gullible, she was talked into refinancing her home 11 times in only five years. The lender had discovered an easy victim to prey upon until the money ran out. In another case, an aged African-American widow had just lost her husband – the funeral was announced in the local newspaper. Somehow an unscrupulous bank lender found his way to her darkened door. This widow in mourning was somehow convinced to refinance her home to repair a leaky roof – on an income of less than $1000 per month. The mortgage broker talked this vulnerable lady into signing a blank form for income verification.
But hanky panky was the order of the day. The form was filled in by the broker after the fact – with a highly inflated figure for monthly earnings. Otherwise, this destitute woman would have never qualified for the loan in the first place. A consumer agency successfully fought the ensuing foreclosure on the debt, so that now the widow owns her house outright. However, this woman ultimately got a free roof repair out of it – which ultimately other consumers will pay for through increased bank fees for all customers.
It is a sorry commentary when large sophisticated lending institutions lose their corporate souls, and take advantage of the most innocent among us – those who are frail, forgetful, lack sophistication, are overly trusting, or who may not speak very good English. But it is just as shameful that our federal government allowed it to happen – both political parties included. The Securities and Exchange Commission (SEC) has been asleep at the switch for years, through many a presidential administration. The SEC has allowed exotic investment products to be sold with utter abandon.
As a result, shaky sub prime loans were combined and sold on the stock market along with prime loans, as a type of “investment product”. The bundles of various loans were then sliced and diced in all sorts of ways for further sale. As a result, the originators of the shady sub prime loans were never held accountable. When sub prime loans were defaulted on in record numbers, money market and pension funds took a nose dive in value. Why? Because these are the types of questionable investment products being marketed to and invested in by pension funds. Again why? AAA ratings were bought and paid for from the rating companies – by the lending institutions themselves.
The Federal Reserve and the U.S. Senate Banking Committee have also been unwise, encouraging the marketing of exotic adjustable rate mortgages. I am by no means comfortable that the current political posturing in bringing civil and criminal charges against lending institutions or creating another consumer protection agency will result in any meaningful reform. Where were the consumer protection agencies the federal government already has when all this was going on, and where are they now? Most consumers are not being given more affordable mortgage remodifications, despite all the stimulus money spent towards achieving that laudable if unattainable goal.
Lesson to be learned
: Consumers cannot trust lending institutions any more than they can trust their government to protect them. It is imperative that a consumer fully understand any document s/he is signing. And above all, if something sounds too good to be true, it almost assuredly is!
Elaine Roberts Musser is an attorney who concentrates her efforts on elder law and aging issues, especially in regard to consumer affairs. If you have a comment or particular question or topic you would like to see addressed in this column, please make your observations at the end of this article in the comment section.
