Predatory lending is often used to describe poor loan placement, deception in the terms of the agreement, shady brokers using blank documents and not making important disclosures, and other related scams. Many of these tactics are used to fraudulently induce buyers or current owners into taking out a loan that is not in their best interests and which they will most likely fail to repay. But the extra fees generated at the closing for the lenders make such practices attractive to banks and loan originators attempting to cash in before the loan goes bad.
For example, take the case of John and Mary, who wanted to use the equity built up in their house to pay off high credit card balances, replace an old car, and put some extra money in the bank. Despite the fact that their credit was not good, their mortgage broker Bill put them into a 90% financed Option ARM at 3% interest for the first five years. John and Mary were not told it was an adjustable rate mortgage -- Bill simply signed their names on the required disclosure. But that was perfectly alright with John and Mary, who had applied for a stated income loan and "rounded up" their monthly income an extra few thousand dollars.
At the closing the loan, John and Mary thought they had gotten a great deal on a low-interest mortgage. Little did they know that their minimum payment would not even cover the interest charge, and every payment they made would cause them to fall further behind, thereby eating up the remaining equity and resulting in a negative equity position. Like so many homeowners, though, they did not read their mortgage statements and would not have understood the numbers even if they had read them.
On the other hand, mortgage servicing fraud happens after the loan has been originated. The lender packages the mortgage with other similar debt products and sells this package to investors such as hedge funds or financial investment firms. The rights to collect the payments are sold to pension funds or mutual funds, while a servicing company is hired to administer the loan, do the accounting, receive the monthly payments, maximize profits and minimize losses on the debt products, and proceed with a foreclosure if the owners default.
The fraud comes in when borrowers are deliberately pushed towards foreclosure by the mortgage servicer. This may be a result of "accounting errors," forced insurance, "misplaced" or "lost" payments, or negative escrow balances that incur late fees and interest. In any event, the company increases junk charges in order to make it nearly impossible to stop foreclosure by paying back the loan, and the mortgage company ends up being able to sell the house on the open market after a sheriff sale for a price that far exceeds what they would have received if they had simply serviced the loan legitimately and collected payments over time.
So in our example above, after the first two years of making payments on their loan, John and Mary received a letter from their mortgage servicer threatening foreclosure because they were behind by three months. Knowing that they had not missed a single payment, Mary called the lender. After spending an hour and a half on hold, she was told by a customer service rep that they did not have qualifying homeowners insurance, so the lender had placed their own insurance on the house, at a high rate. Mary, of course, knew that they had property insurance and offered to fax proof to the mortgage servicer.
When proof of insurance was faxed, John and Mary thought the problem was taken care of, so little did they expect to be served by the county sheriff with foreclosure lawsuit papers a few weeks later. They immediately called the mortgage company, who informed them an hour later that they had never received the faxed insurance papers and gave the couple a new number to fax it to. John complied by faxing and getting a confirmation the paper went through, and called the next day to make sure. Imagine his surprise when the company said it had not received the fax and that the forced insurance would stay and the foreclosure continue.
By this time, thousands of dollars of extra fees for the placed insurance and lawsuit had been added to the loan, along with several miscellaneous corporate charges, escrow charges, and others. The servicer refused to explain any of these charges over the phone and would only fax payoff statements through their attorneys showing the total amount of the fees, not what they were actually related to. At this point, John and Mary stopped thinking a horrible mistake had been made and began to realize something much more sinister was going on with their loan and that they had become victims of a corrupt bank.
Although they had missed the time to file an answer to the foreclosure complaint, and a default judgment had been awarded to the bank, Mary went to the courthouse and demanded to speak with the judge. The judge listened to her, but refused to acknowledge any of the fraud, rules violations or mistakes the lender had committed, saying to Mary, "They have a judgment against you; you had time to file an answer just like anyone else. If you don't like it, you can appeal or hire an attorney." At this point, the couple realized the corruption of the bank had spread into the local government, as well.
With the sheriff sale fast approaching in a couple of months, John and Mary did all they could to borrow from family and save up enough to pay off the amount the servicer said they owed. But a month before the auction date, the family received its latest mortgage statement showing a doubling of their mortgage payment. The original Option ARM loan had reset to a higher interest rate, and because the loan was underwater, the payments were increased even more to start paying down the mortgage over the remaining term.
At this point, with their credit rating destroyed, the mortgage payment doubled even if they could save up enough to reinstate, and the house up for auction in a month, John and Mary threw in the towel. Although the loan originator and mortgage servicing company had made their thousands of dollars, and the family had never missed a legitimate payment, they felt there was little else they could do than move on, blaming themselves for the failure. Everyone, from the banks to the local government, it seemed, had decided they deserved to lose their home and suffer the effects of a foreclosure for the next decade of their lives.
How many more people like John and Mary will come out with similar stories of mortgage fraud from beginning to end, a fraud which they may have participated in but which only they have felt the negative consequences of. Accountability for the banks is a hollow catch phrase when they are receiving hundreds of billions of dollars in bailouts, while bankruptcy reform laws make it more difficult for homeowners to get out from under crushing debt burdens. And the government, in bed with the banks from the local levels to the heights of power in Washington, takes money away from the people to keep the fraudulent monetary system afloat for a few extra months.
Our mortgage and real estate industries are corrupt from top to bottom, from beginning to end, and the foreclosure crisis is just another way for the banks to impoverish ordinary people while enriching themselves. That they have the audacity to perpetuate such frauds on homeowners and then blame those same homeowners for the collapse is a signal of just how much more powerful banking interests are than the people. That elected officials go along with the charade by bailing out the banks and sticking people with the bill is even more reprehensible.
on August 12, 2008, 3:10 am