|
What’s the most expensive luxury in the world? Being broke, that’s what. Those who can least afford it are often charged outrageous fees for the privilege of being in that category.
When low-income people seek to fulfill the American Dream of owning a home, they often fall into the clutches of predatory lenders. The same thing can happen to people trying to repair or upgrade homes they already own. Property taxes have been another source of problems, especially since the re-assessment. All too often, they wind up losing not only the home, but what little credit they had.
“Everybody has a right to the American Dream, and they should be able to eat while achieving it,” said Mary Ellen Hayden of ACORN (Association of Community Associations for Reform Now).
According to City Paper, whose investigative reporter Rich Lord has been writing a series of articles on predatory lending practices since last January, foreclosure filings in Allegheny County tripled from 1995 to 2001, when over 3,000 properties were foreclosed. Reviewing court records, he found that the number of foreclosure filings by sub-prime lenders increased nine times, i.e. 900%, in the same time frame. Since then foreclosures have continued to soar.
The Department of Housing and Urban Development defines predatory lending as “engaging in deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower’s lack of understanding about loan terms.”
It’s not that the victims of these lending practices are stupid, it’s that the tactics these lenders use are extremely misleading, and they market aggressively. They confuse borrowers by rushing through explanations of paperwork, or not explaining at all. Beware anyone who asks you to sign a paper not completely filled out. “Don’t worry about the details” often means you’ll have plenty to worry about down the road.
Predatory lending practices
- Lending more than the borrower can afford. HUD guidelines say that shelter costs, including utilities, should not exceed 40% of a borrower’s income. Most low income people, especially renters, would say to that, “in my dreams,” but sub-prime lenders often stretch borrowers far beyond that. Some buyers have found themselves with mortgage payments they could just barely manage, in drafty houses and out-of-sight heating bills.
- Inflated closing costs. Low-income borrowers have been charged much more than the going rate for closing cost items such as title search, appraisal, termite inspection, lawyers’ fees and credit check. These services may even be provided by people working for the lender.
- Exorbitant fees. One category is called single premium credit insurance. These are charged up front and added to the loan, so the victim pays interest on them as well. Lenders may deserve some compensation for taking on the higher risk of lending to someone with poor credit, but not to the extent many borrowers have been charged. An example is the homeowner who took out a home improvement loan for $21,000, of which $17,300 covered the repairs while $4,200 was fees charged by the mortgage broker and lender. The payment was a manageable $249/month, but then the lender tacked on another $170/month homeowner insurance premium.
- High interest rates. The homeowner mentioned above was charged an annual percentage rate (APR) of 16.324% when the prime rate was 7%. Hayden of ACORN said that low and moderate income people rarely get interest rates below 10%, while the wealthy are rarely charged above 10%. Rates as high as 26% have been charged.
- Failure to escrow. In standard mortgages, taxes, water and sewage costs are figured into the monthly payment and escrowed (set aside in a special account) until they come due. Sub-prime borrowers have found themselves with payments they thought they could handle, only to be hit with bills for these items above and beyond their monthly mortgage, and no money to pay them.
- Including big balloon payments in the loan. This is a large payment that falls due all at once, often at the end of the term of the loan. The monthly payment is deceptively low, and the borrower isn’t always told about the balloon at closing. When it comes due they need another loan to meet it, again at high interest.
- Lending more than the value of the property. Often this is done by bringing in an artificially high appraisal on the house, done by an appraiser “in cahoots” with the lender, sometimes comparing it to other recent sales of properties that are larger, in better condition, or in more upscale neighborhoods. The buyer is then really stuck, because they can’t re-sell the house for anywhere near that amount if they run into trouble.
- Encouraging repeated refinancing. New closing costs and other fees are added each time; while the monthly payment may not go up, the borrower sinks farther and farther into debt.
- Rushing a decision. This happens especially often in rent-to-own situations. Some clients have gone into such agreements expecting to have a year to decide whether they wanted the house and to shop for financing, only to be pushed into closing after a couple of months, with no opportunity to negotiate the sale price or mortgage rate, or find out if the price is reasonable for the neighborhood.
Besides what happens directly between borrower and lender, there are other sources of problems. It’s common practice in the sub-prime lending industry to sell mortgages, often in batches, to investment firms. Sometimes the industry bundles loans into an investment product called an “asset-backed security” (the asset being your home, friend), in which investors then buy shares.
When mortgages are transferred, the debtors are not always notified in a clear and timely fashion where to send their payments. Sometimes mortgagees stop making payments because they’re confused about where to send them; the next thing they know, a default letter arrives in the mail. Worse, in some cases homeowners have continued making payments and still found themselves in foreclosure because the old loan holder did not forward the money to the new one.
Another factor haunting homeowners is the Allegheny County re-assessment of real property values. For example, one elderly homebound woman, known personally to this writer, saw her assessment jump from $30,000 to $96,000 in 1999, and again to $120,000 in 2000. No way any property in the neighborhood is worth that kind of money; her home is neither large nor elegant, and has multiple problems with deferred maintenance.
While more educated homeowners and those who know how to work the system appealed successfully, most low income people were clueless where to begin, or more discouragingly, took a stab at appealing but didn’t know how to gather data to support their claim and were turned down. Many saw their taxes double or triple; for those who were barely getting by already, it put them over the edge.
To compound the problem, the city sold some of its back taxes and water/sewer claims to Capital Assets Research Corporation. A class action suit settlement in May provided for refund of overcharged interest and penalties, although it did not deal with over-assesment, and set up HOPP (Home Ownership Preservation Program). Another class action suit, settled in November, says that interest and penalties cannot exceed a 10% simple annual rate of interest, rather than the 18% compounded monthly which the city had been charging. That means that every month, those who couldn’t pay taxes (that were excessive to begin with) were charged interest on the interest they’d been charged before.
There’s help to be had
The good news is, there are several places distressed homeowners can find help. Some only kick in after foreclosure begins; others may be able to help sooner, if you’re struggling or just suspect you got a bad deal.
In the Tribune-Review on November 27, 2003, an article by Sam Spatter covered the ACORN settlement. This program, which began in early October, affects thousands of people in this region, who received mortgages from Beneficial or Household Finance.
Mary Ellen Hayden, who started the Pittsburgh chapter of ACORN, said in an interview that she started with a list of people who were threatened with foreclosure and had high interest, high fee loans. One woman, although she had A-1 credit, was paying 26% interest. Eventually this led to a nationwide class action lawsuit, resulting, said Hayden, in “the biggest settlement in the country,” worth $454 million.
It took over two years for Attorney Generals in 44 states to participate. Pennsylvania’s A.G. Mike Fisher signed on at ACORN’s urging. Besides money for interest rate reductions, waiver of unpaid late charges, and deferral of accrued unpaid interest, the settlement provides funds for financial counseling and literacy programs (some people have been unable to read papers they were asked to sign).
“This is a victory for every housing counselor in the country, and activists working together are what made it happen,” said an elated Hayden. “It shows the importance of people working together to help each other.”
Anyone with a Beneficial or Household Finance mortgage should call ACORN right away. The initial interest rate reduction is good for six months, then you need to re-apply. After being renewed twice, the reduction becomes permanent. They can also help Ameriquest clients. If your problem is with a different lender, call them anyway.
Hayden also mentioned that H&R Block’s “instant tax refund” is a loan through Household Finance. Let the buyer (or in this case, taxpayer) beware.
ACORN’s next campaign is to get a national law passed against unfair loans. Local efforts to curb unfair lending practices have been hamstrung by a law prohibiting local governments from regulating lenders, passed by the PA legislature last June after heavy lobbying by the multi-billion dollar lending industry. Swell!
If your problem is with taxes, call the Home Ownership Preservation Project at 412/434-6004 or Hazelwood Initiative, Inc.at 412/421-7234. For a limited time, HOPP may be able to help you get a refund of excess interest and penalty, and negotiate payment plans with property debt collectors. They can also help low income homeowners with other difficulties, such as title problems.
Another source of help is HEMAP (Homeowner’s Emergency Mortgage Assistance Program), created by PA Act 91 in 1983. To be eligible, a homeowner must:
- have received an Act 91 notice from the lender re: delinquent status
- be suffering financial hardship through no fault of their own
- be at least 60 days delinquent
- be Pennsylvania residents
- occupy and own the home in foreclosure
- demonstrate reasonable prospects of being able to resume normal mortgage payments after assistance ends
- HEMAP can have no less than a third lien position
Foreclosure proceedings stop during the process, which takes about four months. Maximum assistance, in the form of a loan at 9% interest, is 24 months or $60,000, presumably whichever comes first. Minimum payment on this loan is $25/month.
The homeowner begins by meeting with a designated counseling agency within 30 days of receiving the Act 91 (foreclosure) notice. The agency prepares an application for PHFA (Pennsylvania Housing Finance Agency). A decision is made within 60 days. The loan closing takes place within 60 days of the decision, and within 15 more days payment is made directly to the loan company to bring the mortgage and taxes current. Then, the homeowner pays 40% of their income on total housing expenses, including mortgage, tax escrow, hazard insurance, and utilities; HEMAP makes up the difference.
The homeowner must re-certify after one year; must seek alternate repayment or refinance options once they’ve established better credit and equity in the property; and is expected to seek education or job training leading to a better job. If the initial application is denied, an appeal may be filed, which is reviewed by a separate team.
For direct inquiries to HEMAP, see below.
Prospective home buyers should consider turning to the Urban Redevelopment Authority, which requires completion of a homebuyer education class through Neighborhood Housing Services, Inc. In any case, if you’re thinking about home ownership, it’s a good idea to work with a housing counselor first, and inform yourself about your options.
Where to Turn:
- ACORN (Association of Community Organizations for Reform Now)
5231 Penn Avenue
Pittsburgh, PA 15224
412/441-6551
<paacornpiho@acorn.org>
- HOPP (Home Ownership Preservation Project)
412/434-6004, Ext 8
- HEMAP (Homeowner’s Emergency Mortgage Assistance Program)
PA Housing Finance Agency
2101 N. Front St
P.O. Box 15530
Harrisburg, PA 17105-5530
1-800-342-2397
- PCRG (Pittsburgh Community Reinvestment Group)
412/322-6053
- Fair Housing Partnership
412/391-2535
- Hazelwood Initiative, Inc.
412/421-7234
|