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Avoiding Predatory Loans
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Avoiding Predatory Loans
Anna Jones (not her real name) is living in the Manna-built condominium she had long shared with her husband who died in 2004. Without her husband’s income and given the financial needs of her live-in daughter and two granddaughters, Mrs. Jones was pressed for funds and considered a refinance to generate a cash cushion. In mourning still, and lacking the long-time financial counsel of her husband, she took the new mortgage in late 2004 without a clear understanding of what she signed. While Mrs. Jones thought the loan was a 30-year fixed-rate mortgage, what she got was in fact quite different. Mrs. Jones wound up instead with a “2-28” mortgage with an initial interest rate of 7.70%, certain to rise to a maximum of 9.20% in two years (with rate adjustments every six months thereafter), and a 24 month prepayment penalty of $1,160 . Manna Mortgage provided her with a true 30 year fixed rate mortgage at a reasonable rate.
In keeping with its mission to provide low-cost, efficient mortgage services to lower-income families not often well served by for-profit mortgage and financial services companies, Manna Mortgage has launched an anti-predatory lending initiative to try to combat the very problems just described in the story above. Our anti-predatory lending initiative, which focuses on refinance loans, aims to educate homeowners about predatory lending and to inform them about the possibility of obtaining loans with good terms, low rates and especially low fees, even if their credit is imperfect.
Education about predatory lending and the availability of mortgage counseling and responsible loans can help people avoid abusive loans. What is ironic about predatory lending is that one of the very factors that attracts the predators—the equity build-up due to the escalation of home values in recent years—actually enhances the opportunities for homeowners to get good loans and improve their family finances, if only these opportunities were made available to them.
Homeowners facing financial crises, including even foreclosure, are often susceptible to predatory mortgage lenders. To entice potential borrowers, predatory lenders promise “no-cost” refinances, quick cash, quick settlements, and no consideration of credit rating, low income, recent bankruptcy, or property condition. These lenders actively pursue homeowners who are vulnerable due to pressing cash needs, illness, age, isolation and a lack of financial understanding. Turned down by most lenders, these homeowners often come to believe that the only lenders pursuing their business are the only ones who will give them a mortgage. Even persons obviously able to obtain good loans get enticed into predatory loans.
Predatory lenders have a goal of “equity stripping,” the taking of high fees (often upwards of $7000 or more) on each refinance. Borrowers are often led to believe their new loan is to be a 30-year fixed-rate mortgage at low rates and zero closing costs. In fact, however, borrowers wind up discovering (often after it is too late) that the rate is fixed for only 2 or 3 years after which it adjusts every 6 months for the next 27 to 28 years. That is not a 30-year fixed-rate loan! And, in fact, the “zero closing costs” have been added to the loan. Borrowers complain of inadequate disclosure and the surprise at settlement of very high interest rates, stiff pre-payment penalties, and high-cost add-ons. They find they are unable to improve their credit standing under the weight of ever-increasing payments and repeated credit-damaging errors in their lender-maintained payment histories. Many borrowers with predatory loans wind up refinancing multiple times, often with the same lender, as their loans become too burdensome. This, of course, only leads to more problems down the road.
Manna Mortgage is working to break the predatory lending cycle. We are trying to help people to improve their situations, not worsen them. We urge them to fully consider what is truly in their long-term best interests. We regularly counsel people against obtaining a new refinance loan – even through us – when it appears not to make good sense. We believe that by providing responsible refinances and purchase loans, Manna Mortgage can help build stronger communities.
We want our loan terms to be seen as “the good money chasing out the bad.”