The e-mail screamed: "3.95 percent 30-year / 4.95 percent 40-year. Mortgages!" An interest rate this low demanded a request for more information.
Back came an answer: Indeed, you could get a new mortgage or refinance a present home loan and the payment rate for the first year would be 3.95 percent. That rate could rise no higher than 7.5 percent in the second year, with a lifetime cap of 10.95 percent.
Further examination, however, revealed the truth. This loan's interest rate was 7.8 percent. So on a $100,000 loan, I'd owe $7,769 in interest the first year. Yet the low payment rate would require me to pay only about half that amount, the unpaid interest would be added back into the initial loan, raising the amount borrowed to $103,082.
Not exactly a bargain.
The payment rate "hook" is just one of many examples that shady lenders use to boost business and soak thousands of home-equity dollars from consumers each year.
Known as "predatory lending," unscrupulous lenders use hidden fees and unneeded refinancing to part borrowers from their money. Recent examples show the dire circumstances that can result:
*Earlier this month, Laura Stevenson of Chicago asked the Federal Reserve for help when she was bamboozled into a $60,000 mortgage on a $25,000 house.
*In May, Iola Bausley, a widow in Chicago, told the Housing and Urban Development and Treasury Departments that her mortgage payment jumped to $1,092 a month because of refinancing, $155 more than her monthly income.
Circumstances like these have led Federal Reserve Chairman Alan Greenspan to speak out about "abusive lending practices." He has prompted the Fed to modify the Homeownership and Equity Protection Act, which regulates high-cost loans. The Fed will hold its last meeting on the issue next month. New regulations could come soon after.
Now big lenders are taking the problem into their own hands. Freddie Mac, the Chicago-based mortgage company, has teamed up with mayors of 12 major US cities to launch a campaign warning Americans about the dangers of predatory lending.
The "Don't Borrow Trouble," campaign will use ads, billboards, and hotlines to educate consumers about the predatory methods of some lenders.
One popular practice is the "loan flip" in which the same loan is continually refinanced, adding fees to the loan balance. Aggressive lenders include single-premium life insurance in these loans and charge new premiums when they are refinanced. Up to 10 points may be added to the loans as origination fees.
Lenders know that those who sign up for such loans will struggle to meet the ever-increasing payments and actively pursue avenues to refinance the loan. As a result, borrowers unwittingly keep increasing their debt to the point that they could lose their homes.
Borrowers have also been duped by taking on loans that include high prepayment penalties, and huge balloon payments.
Predatory lenders often target those with poor credit - the so-called subprime market. The Department of Housing and Urban Development estimates that subprime loan volume has grown from $20 billion in 1993 to $150 billion in 1998.
North Carolina has led the way in passing legislation to curb abuses by lenders. But opponents believe the measures are too sweeping. Some fear the new regulations will limit access to private lenders that have well served homebuyers with substandard credit.
"Absurd," says John Taylor, President of the National Community Reinvestment Coalition. "Predatory lending is designed to strip wealth. Ninety percent of these abusive loans are used for refinancing, not purchases."
John Bancroft, Managing Editor of Inside Mortgage Finance disagrees. "Most of the information about abuses is anecdotal. And there are statutes already in effect. Regulators need to be more effective."
Both Mr. Bancroft and Mr. Taylor note the lack of urgency in Congress to pass meaningful legislation regarding predatory-lending tactics. "Legislation is moving at a snail's pace," says Taylor. "The majority in Congress do not want to do anything."
Both agree, whatever the need for government action, that borrowers need to educate themselves. "Talk to consumer-counseling groups if approached by a lender. Homeowners can call city or county housing agencies for information, says Bancroft.
Taylor is even more adamant about consumer education. "This is one of those subjects that should be taught in schools," he says. "Borrowers should shop around and look for reputable lenders. They should call consumer lending agencies in their communities."
(c) Copyright 2000. The Christian Science Publishing Society