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Monday, November 15, 2010

The Problem with Predatory Loans and an Example of a Predatory Loan.


Too much blame may be being placed on the homeowner when they agree to a predatory loan. It seems to me that a knowledgeable loan rep can figure out how to eek through the loan app system a loan that barely passes, thereby resulting in the highest interest rates and biggest balloon payments allowed.

What if the loan rep had asked the mortgage loan applicant for a written list of their debts and other potential credit score blemishes, then ran a separate credit report and noticed that the report provided by the customer mentioned things that the credit history report did not show?

What if the loan rep did not reveal all of the blemishes that the homeowner revealed to the loan rep, specifically to make sure the loan barely passed, versus failing?
Could not the loan rep decide what additional credit blemishes from the customer's written list to add or withhold so the mortgage application just barely passes, thereby allowing the loan rep to charge the highest interest rate with additional balloon obligations as well?
It seems like the loan rep wins big time if they can barely pass a customer's mortgage loan app. If the customer successfully makes the predatory mortgage payments, the loan rep wings, if the customer defaults because of the predatory interest rates, then the 17 income streams that can be generated because of a foreclosure kick in, including the loss of the down payment.
Excessive interest rate variations between good credit score customers and bad credit score customers may be causing predatory lending. Maybe the highest interest rate loan versus the lowest interest rate loan should be kept within a very narrow difference, of say, 2 percentage points, to help avoid the practice of predatory lending.
Why not offer every mortgage applicant the SAME interest rate and control the amount of money a mortgage applicant can borrow?
Example of a Predatory Loan.

My example uses the premise that Mortgage Loans should not be given out if the bank thinks the customer will fail on them.

Customer A and Customer B get 300,000 dollar loans.

Customer A, with a "poorer" credit score than customer B, is offered 30 years at 8.085 percent interest, which equals a monthly payment of 2,219.10

Customer B, with a "better" credit score than customer A, is offered 15 years at 4.00 percent interest, which equals a monthly payment of 2,219.06

Remembering our premise that banks should not approve any loan that they think may fail, and since Customer A is making the same monthly mortgage payment on the same amount loaned as customer B, but for TWICE AS LONG as customer B, Customer A is the VICTIM of Predatory loaning!
Home loan applicants that are being extended into 30 year mortgage loans for the same monthly payment that they could have gotten in a 15 year loan that came with a lower interest rate is PREDATORY LENDING.
If I were an attorney trying to prove that predatory lending victimized my forclosure client, I would try to find examples where similar loan amounts were being approved to other home owners near where they lived that allowed the applicant to pay off a loan in half the time, but with the same monthly payment amount.
That IS discrimination and it is IRRELEVANT to say the customer who got to pay off the same mortgage amount in half the time got that deal because they had a better credit score.
In my opinion, any mortgage loan that is going into foreclosure that has any hint of predatory lending attached to it should be suspended until the monthly mortgage payment is recalculated at a fairer interest rate and the excess already paid is credited back to the homeowner; a significant portion of the down payment is credited back to the homeowner (plus any accrued home equity); and that total amount is then converted into "rent money" that could keep the homeowner in their home for several additional months or years with no additional mortgage payments necessary.

Or, the homeowner could be handed a check based on the down payment, accrued equity, and the monthly difference between a predatory loan and what a legitimate loan would have cost, if they desire to leave the home sooner rather than later.

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