We are all victims. We will all feel the crunch.

We’ve all read the news about the mortgage crisis our nation is facing with millions of families losing their homes to foreclosure due to subprime lending programs. This crisis infuriates me!

Why?

Mortgage brokers and lenders found subprime lending extremely profitable because they were able to charge high interest rates, outrageous closing costs, and include prepayment penalties. Some programs, known as Option Adjustable Rate Mortgages (ARM’s), had a potential for negative amortization where the loan balance increased if the borrower paid only the minimum payment required. Unscrupulous mortgage brokers and lenders have taken advantage of borrowers that had fewer options than people with good credit. Now, lenders are crying the blues because these loans are going into foreclosure and forcing them into bankruptcy. What did they expect? These borrowers were setup for financial disaster.

Didn’t lenders know these borrowers wouldn’t be able to make the payments when the interest rate adjusted and their house payment increased by hundreds of dollars? In some cases, these loans were underwritten without even knowing the borrower’s household income or requiring employment information, so lenders made these loans with their eyes closed; totally oblivious to the borrowers’ overall financial situation.

Little is mentioned in the news about the fraud and predatory lending violations associated with these loans. Mortgage fraud and predatory lending is up 500% from three years ago in the Puget Sound area. Subprime lenders, most recently New Century and Ameriquest Mortgage, have been targeted in multi-state investigations by federal regulators for fraud and predatory lending practices associated with their subprime loan programs. It’s not just the credit challenged borrowers who have fallen victim to subprime lending– it’s also the elderly, single family households and minorities with good credit. It’s estimated that up to 15 percent of subprime borrowers have credit scores that qualify them for a traditional loan, at lower interest rates, less closing costs and no prepayment penalties. These borrowers, grappling with complex loan terms and pressure to refinance quickly had a vulnerable moment and mortgage brokers and lenders took advantage of those moments. It all boils down to absolute greed – lenders paid originators a high commission for subprime loans, and their compensation increased if the loan included a prepayment penalty. How can they sleep at night?

Verity has done a lot of mortgage loans over the years; some to credit-challenged members. But the difference is that the loans we did for these credit-challenged members were fairly priced, had reasonable closing costs, no prepayment penalty and are under “stable” loan terms; unlike the Option or 2/1 ARM programs offered by other lenders. Verity did these loans because it put the member in a better financial position, their finances were restructured so they could afford the house payment, and would help the members succeed in the future; not set them up to fail.

Unfortunately, I have met with many members over the years that have fallen into the clutches of unscrupulous loan officers. Recently, I met an elderly couple who previously had a 5.5%, 30-year fixed rate loan with Verity. They received a telemarketing call from a slick talking loan officer telling them how he could reduce their interest rate to 1% and mortgage payment down to $700 per month. Being on a fixed income, these retirees found the reduced loan payment very attractive and refinanced their loan. A year later, I received a call from this member asking me for help. They received their mortgage statement for their new loan and couldn’t understand why their loan balance increased by $9,000. The reason: the loan officer put them into an Option ARM where the borrower has four choices on how to pay their loan. If the borrowers choose the minimum payment, in this case $700, then the loan has negative amortization and the balance owing increases monthly. I was absolutely sick for these members! They were charged $8000 in closing costs, had a prepayment penalty, and had no understanding of how an option ARM worked and the risks associated with this type of loan. Something, the loan officer didn’t bother to explain!

Verity did help these members by refinancing their loan under a reverse mortgage, so now these retired homeowners no longer have a mortgage payment at all. I’ve also seen countless members with good credit put into subprime loans without even realizing it. One particular member (with good credit) closed his refinance loan back in May. He paid $8000 in closing costs for a 2/1 ARM type loan at 10.5% interest and a prepayment penalty to boot.

Homeownership is crucial to growing our economy. The mortgage crisis will negatively impact our overall economy because of the impact the high foreclosure rate will have on the housing market, increased unemployment rate (400,000 mortgage lending employees are unemployed nationwide), and decreased consumer spending– not to mention the decline in the stock market over the past couple of weeks. So, in the end, we are all victims. We will all feel the crunch.

What is Verity doing to make a difference?

We have set aside a refinance relief fund called “Keep the Dream.” It’s a refinance program to help at-risk members get into a loan they can afford, so they can keep their homes for years to come. This is an opportunity for members to protect their largest financial investment: their home. If you are struggling with the challenges of a subprime mortgage, I would love the opportunity to help you keep your home and bring you peace of mind.

Wendy Hovey

No biography available for this author.

7 Responses

  1. Kelly says:

    A few years ago I worked for a mortgage firm that served primarily sub-prime borrowers. Shortly after I started working there the mandatory ARM training came across my desk and I couldn’t believe what I was seeing. It was presented as a great opportunity for people to get into a home or reduce payments. I was very new to the industry and didn’t have any background in lending or finance but I could still see through it.

    I completely agree that the lenders who prey on individuals in order to improve their own commissions without considering the risk to everyone involved are not the greatest people in the world. However, I have to bring up the fact that as citizens of the U.S.A. we have the right (and I would argue the responsibility) to educate ourselves about all of our options in life. Most consumers today have a tendency to skip the fine print. They go to a lender and say they want the lowest possible payment and disregard all of the contracts they sign in order to get it.

    Maybe credit unions can start offering loan option training sessions. People need to know exactly how those “bully” loans work and why they should be avoided. They need to know how to find the information they need when going down the same (or similar) roads in the future. They need to be educated on how to educate themselves.

    There is no more powerful consumer/borrower than the educated one.

  2. Ron Bensley, Jr. says:

    Wendy: Credit unions like Verity have a solid opportunity to transform peoples’ lives by providing a sensible alternative to other home lenders who may not have the purchaser’s long-term well-being in mind. It is essential to educate home buyers not simply to shop for the “lowest number” but for the best overall home loan. I applaud Verity’s “Keep the Dream” concept, since it provides a powerful self-help mechanism for financially-distressed Puget Sound-area homeowners.

  3. Wendy says:

    Kelly,

    I have to admit I’m guilty, like a lot of consumers, of signing legal documents (loan, gym membership, car leases, and the like), without reading them first. Perhaps it’s because of our fast pace lifestyles but more likely because we trust the person presenting them and what they say about the documents.

    Education = Knowledge, Good Judgment, and Wisdom

    Credit unions are all about “members helping members”. This is what sets us apart from other financial institutions.

    Our Home Loan Consultants spend as much time on a denied loan as they do on an approved loan because we care and it’s our obligation to educate our members on 1) steps they can take for Verity to reconsider their loan request, and 2) alert them that there is a lender (sub-prime) out there that will approve their loan under less than favorable terms, what loan programs to avoid and where to look in the loan documents to be sure the loan doesn’t include a prepayment penalty. We have also written several articles such as “How to Protect Yourself from Being a Victim of Predatory Lending”, “Are You Paying Too Much for Your Home Loan?”, and “How to Protect Yourself from Deceptive Advertising”, just to name a few.

    Unfortunately, subprime loans provided only a short term fix for consumers and they had no idea of the long term consequences.

  4. Kelly says:

    I think credit unions can play a big part in educating members on the best loan options and it sounds to me like Verity is already doing that. Keep up the good work!

  5. Katharina says:

    Wow. What an article. This Blog was very educational and extremely well written, therefore great to understand. We appreciate Verity and its staff even more now.

  6. Wendy says:

    Thank you Katharina! We strive to make a positive difference in our members’ lives and financial future.

  7. refinance home loan says:

    I learn a lot from this blog! I hope Variety still work on giving education about the loans to the member.

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