Lately 'subprime mortgage meltdown'
is the phrase on everyone's lips. Aggressive marketing
tactics, scant industry oversight and investors who
wanted to put their money into real estate instead of
the stock market all contributed to an ideal environment
for predatory lending.
Some of the deals they offered were obviously
too good to be true -- nowhere more than in the subprime
market, which serves lower-income individuals with credit
Respectable subprime lenders serve important social and financial functions by offering credit on fair terms to individuals who otherwise might never be able to build home equity. Predatory lenders, however, are a scourge on these same neighborhoods, taking advantage of elderly, less-educated and non-English-speaking individuals by offering egregious loan terms that would drain equity and eventually lead to foreclosure on their homes.
"Not all subprime loans are predatory," Norma Garcia, senior attorney with Consumers
Union, points out. "But virtually every predatory
loan we have seen is a subprime loan."
That's because shady lenders, like predators
everywhere, tend to target the easiest prey: people
with poor credit who have few other options. But Garcia
notes that individuals with spotless credit also fall
victim to bad loans. "Loans that are good subprime loans
might in another sense be predatory for someone who
has good credit," says Garcia. "We see this often among
the elderly and in communities of color -- people with
perfectly good credit who don't have a sense of what's
happening out there in the lending world."
To simply spout "buyer beware" isn't enough, she insists.
"There are definitely people who are ripping others off. To the extent that there are individuals who are being placed in loans with interest rates and fixed fees that are much higher compared to that person's credit-risk profile, that should be a crime," she says.
Think you're being scammed?
"There are some extremely abusive, one-sided contract terms consumers sign because they think that's what they have to do to get the money," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America. But often you can find a better deal if you shop around.
Here are some loan conditions that should make you think twice:
"Money upfront is a really bad sign," says Fritz Elmendorf,
vice president of communications for the Consumer Bankers
Association, a financial services trade group, "possibly
even of fraud." One nominal application fee is fine,
he says. But the point of a loan is that they are supposed
to be giving you money, not the other way around.
An adjustable-rate mortgage can be a good thing for
some borrowers. But it should be a trade-off. In return
for accepting a little uncertainty, the borrower gets
favorable terms, like a lower rate. Too many times in
the subprime market, borrowers are saddled with adjustable-rate
mortgages simply as the cost of getting a loan, says
Michael Stegman, professor of public policy and director
of the Center for Community Capitalism at the University
of North Carolina at Chapel Hill.