Bad loans and broken dreams
The number "631" is awkwardly hand-lettered under the mailbox, and the white paint is peeling away from the side of the house. But there is a wide-limbed oak tree in the front yard, and the handrails leading to the porch are brand new. Inside, a post-wedding Olan Mills portrait hangs over the mantle. Nearby are photos of a granddaughter in a gold graduation gown and a smiling nephew who starts with the Washington, D.C., police force this month. A Christ-in-the-Cradle plant and a potted palm tree soak up the morning sunlight coming through the windows facing Hamilton Street.
Lawrence and Sandy Washington in front of the home Bank One is foreclosing on.
Lawrence and Sandy Washington sit at their dining room table and talk about their home. Sandy handles most of the narrative, but she constantly looks for affirmation from Lawrence, who is absent-mindedly fumbling with his leather-cased Medicare card. The Washingtons had lived here as renters for a dozen years when they learned their landlord was going to sell. They applied for, and quickly received, their first-ever home loan.
It was a relief to be able to stay here. Both Washingtons are disabled - Sandy has had three heart attacks, Lawrence has had a serious stroke. Neither drive any more. But the Kroger grocery on 10th Street is within easy walking distance, and they are close with their neighbors, who often gather on each other"s porches on warm summer evenings. A multiracial couple, the Washingtons have always felt comfortable in this, one of the city"s few multiracial neighborhoods. "If we need help, all we need to do is holler," Sandy says.
They didn"t think they needed help last fall, even when they got the confusing notice from the bank. The Washingtons believed their mortgage payments included payment of their property taxes, but in fact, the Washingtons were expected to pay the taxes separately. The bank took their monthly mortgage payment and applied it to the taxes due, which put the Washingtons in arrears on their loan. Sandy wrote the bank a letter, offering to make arrangements.
The only reply she received were papers delivered marked Cause Number 49D07-0203-MF-462, Marion County Superior Court. Bank One had sued the Washingtons for foreclosure on their home.
"They just kept handing us more"
Predatory lending is a tough concept to define, but it turns out the Washingtons" mortgage practically offers a primer on the characteristics of a predatory loan. Predatory lending is the increasingly widespread practice of signing unsuspecting homebuyers or homeowners for mortgages they can"t afford. One of the reasons they can"t afford the mortgages is because they are packed with unfavorable terms the buyers may never be aware of. (See sidebar, "What Makes a Predatory Loan.")
In the Washingtons" case, they were given a so-called "sub-prime" loan, which has a higher-than-market interest rate set to reflect a riskier debtor, even though the Washingtons likely could have qualified for a market rate loan. A recent study for the Center for Community Change in Washington, D.C., found that African-Americans and Latinos are more likely to have sub-prime mortgages than whites, even if they have similar financial circumstances.
Like many sub-prime loans, the Washingtons" mortgage contains a balloon payment. A balloon payment is a large final payment, in the Washingtons" case nearly equal to the entire amount they received when the loan was signed. When the balloon payment comes due, the Washingtons already will have made 179 monthly payments, but they mostly just covered interest and fees. Under these terms, it will be all but impossible for the Washingtons to build significant equity in their home. Also, the amount of lender and closing fees financed into the Washingtons" loan total a whopping 12 percent of the loan"s cost, compared to 1-3 percent of a traditional mortgage. Such high fees are another characteristic of predatory loans.
The attorney representing Bank One in its foreclosure action against the Washingtons did not return calls seeking comment for this article.
The Washingtons actually entered into their current mortgage in an ill-fated attempt to escape a previous bad loan, this one from a division of CitiBank. That first loan featured some of the few characteristics of a predatory loan missing from their current mortgage: over-priced single-premium credit insurance and an interest rate that ratcheted up soon after they signed the loan. The Washingtons now admit they never fully understood the terms of either mortgage. "We were trying to read the papers at the closing, but they just kept handing us more," Sandy says.
What makes a loan "predatory"?
Predatory lending refers to unfair practices by the issuers of "sub-prime" mortgages - mortgages with interest rates ratcheted higher, ostensibly to compensate for borrowers" less-than-perfect credit histories. Here are some characteristics of predatory loans:
Borrowers in predatory loans are routinely charged broker or lender fees of nearly 8 percent of the loan amount, compared to the average 1-2 percent assessed by banks to originate other home loans.
Charging high, sub-prime interest (9-20 percent) to borrowers who have good enough credit to qualify for prime-rate loans (8-9 percent). A recent study by the Center for Community Change showed that black and Hispanic homeowners are more likely to have sub-prime loans than whites with similar incomes.
Making Loans Without Regard to the Borrower"s Ability to Pay
Some predatory lenders make loans based solely on a homeowner"s equity, even when it is obvious that the homeowner will not be able to afford the payments. For mortgage brokers, the motivation to engage in this kind of practice is a desire for the fees generated by the loan. For some lenders, especially when there is significant equity in a home, the motivation is the ultimate foreclosure on the house, which can then be resold for a profit.
More than two-thirds of sub-prime loans have prepayment penalties, compared to less than 2 percent of conventional prime loans. The penalties come due when a borrower pays off their loan early, typically through refinancing or a sale of the house. Prepayment penalties on sub-prime loans can have the effect of keeping people tied to a lender who overcharged them, sometimes on an adjustable rate loan, and prevent people who establish and maintain improved credit from moving to a better loan.
Adjustable Rate Mortgages
Loans with rates not tied to an economic indicator, and may include an artificially low teaser rate to lure borrowers.
Home Improvement Scams
Some home improvement contractors deliberately market to lower income neighborhoods where homes are in most need of repairs, but the owners are unable to directly pay for the service. The contractor arranges loans that have the lender directly paying to the contractor, which means that the homeowner has no control over the quality of the work.
Single Premium Credit Insurance
Credit insurance is insurance linked to a specific debt or loan which will pay off that particular debt if the borrower loses the ability to pay because of illness, death or unemployment. With "single premium" policies, the credit insurance is paid in one lump sum payment, which is then financed into the loan. Typically, single premium credit insurance policies cost four to five times as much as monthly-paid credit insurance and over 10 times as much as term life insurance policies.
Mortgages with balloon payments are arranged so that after making a certain number of regular payments, the borrower must pay off the remaining loan balance in its entirety, in one "balloon payment." Balloon mortgages, especially when combined with high interest rates, make it more difficult for borrowers to build equity in their home.
Flipping is a practice in which a lender, often through high-pressure or deceptive sales tactics, encourages repeated refinancing by existing customers and tacks on thousands of dollars in additional fees or other charges each time. Some lenders will intentionally start borrowers with a loan at a higher interest rate, so that the lender can then refinance the loan to a slightly lower rate and charge additional fees to the borrower.
Sources: ACORN, Organization for a New Eastside
Tons of balloon notes
The surface of Crystal Francis" desk is covered with stacks of the fine-print documents the Washingtons signed for their latest mortgage. Mortgage Payment Letter, Escrow Waiver Acknowledgment, Balloon Note, Addendum to Fixed Rate Note, Mortgage, Prepayment Rider, Assignment of Mortgage and more, including an eyebrow-raising appraisal valuing the Washingtons" home at $60,000. Francis is an attorney with the Senior Law Project of Indiana Legal Services, and she shakes her head as she sifts through the stacks of papers. "Part of the problem is that it takes even me quite a while to figure all this out, and I have three degrees," she says.
But she must figure it out quickly, because the Washingtons" reply to Bank One"s foreclosure lawsuit is due the next day. And, as important as the matter is to the Washingtons, there is no time for Francis to linger on their particular case. Francis must get back to work on other cases for other clients, like the 81-year-old woman of questionable mental competency who signed the latest in a series of mortgages with a pile of fees, an assessment placing the home"s worth far higher than its actual value and monthly payments totaling more than half her income. "There are a ton of these cases," Francis sighs. "And more come in each week."
There are three Dry-Erase boards set up in the front of Room 260 of the City-County Building. Four hundred and seventy-three squares are drawn on the boards, each indicating a Marion County property that a court has ordered to be auctioned off at today"s foreclosure sale.
The seats in the room are full, and a dozen or so people lean their backs against the walls. They shuffle papers and wait for the woman from the Marion County Civil Sheriff"s Office to call out the properties. "Number 365, the bid is for $67,425.40 by Bank One, going once, going twice, going three times. Sold to Bank One." Bank One gets a few of these properties, Sullivan Funding and McKenzie Investments get a few others. Most of the bidders are the original mortgage holders, none appear to be the foreclosed homeowners. Sometimes a bidding competition starts, but not often.
Unless they win their case, the Washingtons" house is slated to be listed in one of those squares. If it comes to that, they certainly will not lack for company. The Mortgage Bankers Association of America reports that Indiana had the highest loan foreclosure rate of any state - and Puerto Rico - during the last quarter of 2001. In Marion County, the number of foreclosure judgments leading to these sheriff sales has increased by more than 400 percent from 1996 to last year.
"A lot of people get into a low interest rate mortgage, not a fixed rate, and a year later they find themselves with a massive house payment," says Marion County Sheriff Major Shirley Challis, who oversees these sales. Challis says bad lending is the No. 1 reason for the increase in foreclosures, followed by a slumping economy and an accompanying rise in bankruptcies.
The last number is called. The buyers head out to the elevators to the 11th floor, where they will claim their deeds. Challis" assistant, Paula Lundin, balances a 2-foot-high stack of manilla folders as she pulls the door closed to Room 260. She"ll go back to her office and begin the preparations for next month"s sale, this time including 481 properties. "Sad, isn"t it?" she asks.
Do you have a claim?
A nationwide class-action suit has been filed against mortgage lenders Household International and its subsidiaries, Household Finance Corporation and Beneficial Corporation. The suits accuse the lenders of deliberately misleading borrowers about the terms and conditions of their loans, including high rates and fees, principal amounts which exceed the actual value of their homes and prepayment penalties. The plaintiff class for the suit includes all borrowers induced to enter into secured loans to consolidate existing debt. The suit asks a federal court in Chicago to restore interest paid and fees to the borrowers and to award actual and punitive damages. Household borrowers who want to learn more can visit www.acorn.org or call ACORN toll free at 1-877-692-0233.
"That type of lending should be against the law"
Several pending congressional bills would prohibit predatory lending practices. The federal Predatory Lending Consumer Protection Act, co-sponsored by Rep. Julia Carson of Indianapolis, would ban balloon payments and limit the financing of points and fees to 3 percent of the loan amount. State Rep. William Crawford, also of Indianapolis, has introduced a state anti-predatory lending bill which would prohibit single premium credit insurance and would require pre-signing loan counseling for sub-prime borrowers.
Neither bill has progressed very far, but Crawford did take the floor of the Indiana House in the waning days of this year"s session of the General Assembly to talk about predatory lending in Indiana. After he spoke of the widow in Lebanon, Ind., trying to pay $800 a month in mortgage payments on her $811 monthly retirement income, Crawford found that several other legislators from both parties shared the same concerns.
"All over the state people are talking about mortgage foreclosures," he says. "And that"s a good thing because we need to build community awareness of the scope of the problem." Crawford intends to make Indiana"s dubious distinction as the No. 1 foreclosure state an issue in public hearings across the state this summer, and then re-introduce his bill for next year"s General Assembly session. "I"ve heard rural and suburban legislators, both Republican and Democrat, agree this is a problem, so I don"t think partisanship will come into this," he says. "The struggle will be with the mortgage bankers."
Indeed, Tom Dinwiddie, a lobbyist with the Indiana Mortgage Bankers Association, opposes the Crawford legislation and the pending federal bills. He says that borrowers would be sufficiently protected by existing laws, including the Indiana Loan Broker Act and a variety of civil and criminal penalties against fraud, if these laws were vigorously enforced. "The Crawford bill and the federal legislation deal with disclosure and rate levels and terms and so on, but the problem here is with plain old-fashioned white collar crime, and crooks don"t care about disclosures or rates," Dinwiddie says. "This sort of legislation would simply reduce credit for those who need it. Lenders will just abandon the market if they can"t make loans at rates they need for investing."
Dinwiddie also objects to the very term predatory lending, saying that mortgage fraud problems are caused by a variety of professions, including appraisers. "It is a problem not limited to lenders," he says. "When a lender invests in a property where an appraiser has valued it at twice the amount it is worth, the lender is the victim."
But David Swanson of ACORN (Association of Community Organizations for Reform Now), which has led struggles against predatory lending in several states, says it is misleading to label the problem as one of fraud and criminal behavior alone. "There are abuses that can be found in loans that are perfectly legal," Swanson says. "But when those loans have terms like pre-payment penalties, mandatory arbitration and single premium credit insurance, that type of lending should be against the law. Clearly the existing legislation is insufficient to protect borrowers."
Swanson also refutes the claim that predatory lending restrictions would dry up the market for sub-prime loans. He points to the experience of North Carolina, which in 1999 enacted the nation"s first state anti-predatory lending law. Even after the law took effect, the state continues to be one of the nation"s top 10 states for sub-prime lending, and no significant sub-prime lenders have left the market. "If lenders would just make loans on the basis of the borrower"s ability to repay the loan rather than with the goal of stripping equity from the home, they would be a long way toward complying with any of the proposed new laws," Swanson says.
"Soon enough, no one wants to live there"
As with most weekday mornings, the Washingtons can be found in the cramped offices of Organization for a New Eastside (ONE), located in a converted Dairy Barn on 10th Street. They have been coming here faithfully since the group was founded five years ago. Soft-spoken Lawrence Washington is ONE"s newly-elected president. The group focuses on tasks like getting new sidewalks and extra police patrols and badgering absentee landlords. "If we get drug dealers in the neighborhood, we all work together to throw them out," Sandy says. They hope to do the same with predatory lenders.
ONE Director Ken Moran walks to a fold-out table and spreads out a dozen Polaroid photos of homes on North Keystone, DeQuincey and Drexel. All the homes are in the neighborhood, all are abandoned and all are in various states of disrepair. ONE says these properties are just a few of 288 foreclosures in the area due to predatory lending. "Most of the mortgages were for $55,000-$60,000," Moran says. "Much higher than the average property value here."
Beyond the individual struggles of homeowners like the Washingtons, ONE and other neighborhood groups say predatory lenders are tearing up their communities. Overblown assessments are made, bad loans are issued and the predictable foreclosures often leave behind abandoned homes. Deserted homes gather more than just weeds and trash. They also become sites for vagrancy, drug dealing and even, down the street from the Washingtons last summer, the rape of a 5-year-old girl.
ONE has confronted some of the lenders who hold the mortgages on these empty properties, including a division of CitiBank, the largest bank in the world and the lender on several of these neighborhood eyesores. The confrontations haven"t yielded much in the way of results yet, or even a whole lot of attention from the rest of the city, but the neighbors are still badgering the lenders. They feel they have no other choice. "You get a couple of abandoned homes in a block, with the trash and crime that comes from that, and then soon enough no one wants to live there," Moran says. "Bad lending is what leads to the decline of a neighborhood."
Silently and simultaneously, Lawrence and Sandy Washington nod their heads.
Where to turn for help
Attorneys and credit counselors say that many borrowers who enter into predatory loans had other financing options they never explored. If you or someone you know is considering entering into a mortgage, you can get advice on whether it is a fair deal for you from the Consumer Credit Counseling Service of Central Indiana, (317) 266-1300, a non-profit community organization that offers credit and home ownership education. Senior citizens considering entering into a loan can contact the Senior Law Project of Indiana Legal Services, (317) 631-9410.
Fran Quigley is a contributing editor for NUVO. He also works for a new non-profit organization, Indiana Appleseed Center for Law and Justice , which has identified predatory lending as an area for advocacy. For more information on Indiana Appleseed, check www.appleseeds.net/in.