Its a jungle out there

As the above cited mortgage web site question and answer shows, some mortgage lenders mistakenly lead borrowers to believe that obtaining a mortgage is like buying a ticket on a Greyhound bus. Remember the ad jingle, "Ride the bus and leave the driving to us." Well, if you think you can leave the driving to your lender, one thing is true: You may get taken for a ride—but not on a scenic highway. Instead, you may end up in a jungle of predatory loan reps and/or predatory loan products.

In fact, FTC investigations, HUD studies, and congressional hearings throughout 2007 continued to expose the wild side of mortgage lending. The attorneys general of no fewer than 13 states have opened investigations of the anti-consumer practices that run rampant among banks, their mortgage loan subsidiaries, and mortgage brokers.

What Is Predatory Lending?

When journalists write about predatory lending, they tend to focus on the sub-prime mortgage market (say, unsophisticated borrowers with credit scores below 620). In this ruthless world, unsavory loan reps prey on widows, the elderly, the mathematically challenged, and other innocents. These hapless souls often get stuck with mortgage points and interest rates that more than double the going rate for smart, credit-strong borrowers. Often these prey lose nearly everything. To try to keep up with their impossibly high mortgage payments, they deplete their cash, run up their credit card balances, borrow from friends and family—and yet still lose their properties.

Unfortunately, journalists slight the other half of this story. Some lenders gouge borrowers at the prime and super prime levels of wealth, income, and credit scoring. Without keen senses, even you can get shaved by sharp practices that may include:

  • Garbage fees, over charges
  • Bad faith estimates of closing costs
  • Undisclosed prepayment penalties
  • Misleading assumption clauses
  • High cost, "no cost" loans
  • Lowball rate quotes
  • Oversized yield-spread premiums
  • Flimsy rate locks
  • Lowball/highball appraisals
  • Deceptive advertising
  • Conspiracy to commit fraud

You might ask, "How can loan reps and lenders get away with these predatory tactics?" As the Citigroup fine shows, some attacks do get punished—especially when they leave claw marks on their victims. Yet, in many cases, such practices don't violate the law in provable ways. When you close your loan, you sign, see, or initial dozens of documents, forms, and disclosures. How much time will you take to carefully read, review, and question this paperwork? Not much, right? The papers will come fast and furious. "Sign here, sign here, sign here, sign here . . . "

Written Trumps Oral

Later, when you discover an above-market interest rate, an $8,000 (or more) loan rep sales commission, an onerous prepayment clause, a $400 fee you don't understand, an impotent right of assumption, or a credit life insurance policy you never knew you ordered, your complaint will fall on deaf ears. Why? Somewhere in the file a document will establish your knowledge and consent. You then respond, "But the loan rep told me . . ." So there it is, a written document with your signature that conflicts with your recollection of oral discussions. Which will prevail in a regulatory hearing or court challenge?

Nine times out of 10, the paper trail trumps mistaken understandings. Generally, the paper trail loses only when the language of the documents shocks the conscience of the court. Given that lenders employ crafty lawyers to draft their documents, you will find that few judges ever respond with shock. Moreover, in some cases, government itself mandates the use of deceptive forms and disclosures. To name three: the supposedly "Good Faith" Estimate of settlement charges; the APR disclosure (see Secret #39); and the FHA appraisal and property condition disclosure form. Many borrowers believe that this form assures them that FHA certifies the property's good condition. In fact, the form actually states that FHA certifies nothing about the property's state of repair. (However, to FHA's credit, it is trying to improve borrower understanding to reduce this confusion.)

No, Most Lenders and Loan Reps Aren't Crooks

Okay, let's talk context and perspective. Nothing in Mortgage Secrets intends to imply that all loan reps lie awake nights thinking up ways to cheat their customers. But from Babbitt to Willie Loman, salespeople (like lawyers) have enjoyed far more ethical slack than other occupations. Whether we call it puffing, salesmanship, competitive spirit (or legal argument) salespeople (and lawyers) all too easily slip into partial truths, nondisclosures, and deceptively clever explanations.

Never forget: A loan rep wants you to buy a product that he or she is selling at the highest price he can persuade you to pay. A loan rep earns a commission, salary, or bonus based on his or her ability to sell. Loan reps prosper when they convince you that they offer a better deal than you can obtain elsewhere. Because it's mathematically impossible for a majority of lenders and loan reps to actually offer the best deal—although most promise to do so—it remains your responsibility to identify and negotiate the deal points that get you the loan you need on the best terms available.

Ask questions, probe for detailed answers, run the numbers, compare alternative lenders, compare alternative loan products, search out nontra-ditional possibilities, shape up your borrower profile, explore a variety of property types and locations. Your reward could easily total $10,000 (or more, much more).

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