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Predatory & Opportunistic Lending Practices – Watch Out, You May Be The Next Victim

There is a mortgage lending practice that I call “Opportunistic Lending Practices” which some people might think of as  “Predatory Lending Practices”  that you need to be aware of.  Many borrowers fall victim to these practices, especially during times of “easy money.”

Now, before I go any further, I need to point out, like I said above, that there are actually two different types of these Opportunistic Lending Practices.  For the purposes of this article, I’m going to call the non-Predatory Lending Practices portion of Opportunistic Lending Practices simply “opportunistic lending.”

And, I also need to mention that I am not a lawyer or any other type of legal professional.  Check with your legal professional if you think you might be a victim of any of the practices that I discuss here.

 

There two types of Opportunistic Lending Practices that I think you need to worry about:

Opportunistic Lending – These are lending practices where the lender takes advantage of the greed or need/desire of the buyer to get a better housing situation knowing full well that the buyer probably will not be able to complete the contract… Although they might never admit it, even under oath, the lender is probably interested in foreclosure in these situations.

Although many States in the United States of America have laws strictly controlling the ability of the lender to profit from the foreclosure itself, there are ways to walk in the grey areas… Especially, if the lender is willing to be unethical.

Predatory Lending Practices – These lending practices are blatantly illegal and are legally a type of fraud.  As it was explained to me by my lawyer, Predatory Lending Practices are things that are obviously taking advantage of an individual who does not have the capacity to actually make the decisions required to commit to buying a mortgage (You do buy a mortgage, by the way.  You buy it with your interest and fees.).

Predatory Lending Practices

A mentally retarded individual who was never actually declared to be legally incompetent, a person of a very low educational level, or someone who can’t read English well could be examples of who might actually be a victim of Predatory Lending Practices.  In these types of prosecutions the lender must actually take advantage of the individual causing them to lose their property or money as a result of the lending activity.

Another type of what I think is predatory lending might be a situation where a lender will give you a loan that you are actually not qualified for, but then fraudulently make it look like you are qualified, expecting you to eventually default on your mortgage and then they can foreclose, etc.

Note: giving you a mortgage loan that you are just barely qualified for is not Predatory Lending.  It’s just bad judgement on your part… You can always say “No.”  Looking at it as a potential criminal prosecution, I think that it would be irrelevant that the lender gave you the loan believing that you will default so they can foreclose, etc.

If you require more information, contact your legal professional of choice for advice.

Opportunistic Lending

Unfortunately for the buyer of a mortgage, there is a large area of lending practices that I call “opportunistic lending.”  I believe those practices to be ethically wrong and may actually be a valid cause of action if you can prove that you lost money or other real property because of what the lender did. The burden of proof that your grievance had merit and was a valid cause of action would be upon you.

In this type of practice, a lender will give you a mortgage loan that you are just barely qualified for expecting you to eventually default on your mortgage and then they can foreclose, etc.

This is pretty much what the “Sub-Prime Mortgage Scandal”  was all about a few years ago.

There are a number of ways that lenders can take advantage of the financially weaker individuals.

 

Here’s What Happens When Your Home Is Sold In A Foreclosure Initiated Sheriff’s Sale…

 

Based upon information contained on the Fannie Mae website the following will occur:

When your home is sold in what is generally called a “Sheriff’s Sale,” what happens next depends on how much you owe to the lender and how much your home is sold for as well as where the home being sold because of a foreclosure action is located.
 
If the home sells in the Sheriff’s Sale for more than you owe plus reasonable fees and related charges, the difference must be returned to you in all the states that I am aware of.
 
If the home sells for less than you owe, plus reasonable fees and related charges, the company may pursue you legally, in court, to collect the difference which is usually referred to as a “deficiency.” However, in some states the lender is not allowed to sue you to collect the deficiency.
 
If the mortgage company buys your home in the foreclosure sale, the home is then their property subject to any “redemption” or “dower rights” and/or related law in the state where the property being foreclosed is located. It is my understanding that some states may control the lender’s right to buy the property for which they hold the mortgage. Consult your Attorney concerning your specific situation.
 
Assuming you have no dower right or right of redemption with respect to the foreclosed property and/or you failed to exercise any right which may exist in those regards, your interest (i.e. ownership of or right to) in the property is completely ended at the point-of-sale. So, if the mortgage company subsequently sells your former home at a profit, the profit is entirely theirs.

 

Find Out About Fannie Mae

 

Three Examples Of What May Be Opportunistic Lending

 

Example #1: Reduce The Term Of Your Mortgage To “Save” Thousands

One way that an unscrupulous lender may try to turn you into a lending opportunism victim is to get you to reduce the term of your mortgage.  For instance, if you are trying to refinance a 29-year mortgage, your lender or a mortgage broker may encourage you to apply for a 15-year or 10-year mortgage to “save” money.

When times are good, it might work well for you and there is always the promise of paying the mortgage off early and thereby saving yourself thousands of dollars in finance charges and interest.

Unfortunately, when they reduce the term of your mortgage, the size of the monthly payment increases, often dramatically.  This type of opportunistic lending practice works with a fixed-payment type mortgage but lenders or mortgage brokers usually do this with an ARM loan.  Here’s how this opportunistic practice would work with both types.

Fixed-Payment Mortgage

With a fixed-payment mortgage would be to get you into a shorter mortgage with a much higher payment.  As an added incentive, the lender might throw in a lower interest rate or similar incentive that will “save you even more money.”

You can qualify for the mortgage because you are working full time when the economic climate is good.

But, when times get tough and you lose your job or can’t find work (if you are self-employed) and you have savings that are too low to get you across the bad spot, the lender can anticipate foreclosing and suing you for the part of the mortgage that they don’t get back in the sale.

This can be very profitable from the lender’s perspective… Especially if the general appraisal of the area your home is located in has appreciated dramatically since you took out the loan but the economic conditions at the time of the Sheriff’s Sale has driven the sale price of the home way below what you owe the lender.  Then, in two or three years, after the economy improves, the lender simply “flips” the property for way, way more than you owed.  It’s just icing on the cake if the lender can rent out the property or issue a land contract for the property’s purchase (most land contracts are foreclosed).

Adjustable Rate Mortgage (ARM)

Initially, at the time the loan is made, the interest rates may be low enough for the borrower to qualify for the loan.  But when the interest rates are revised up as the economy worsens as it always eventually does, the payments increase.  Most borrowers, except the very rich, will begin to have difficulty making the payments on the loan.

Unlike with the Fixed-Payment Mortgage, this variation doesn’t need an economic down-turn to “rain on your parade.”  It just takes a significant increase in the index that your Adjustable Rate Mortgage is tied/pegged to and you may find yourself in scalding-hot water.

The lenders don’t look at this type of situation as a “flip.”  They would see it as a “sit on the property” type situation because they are going to put off the sheriffs sale as the property appreciates.

In the mean time, although some owners may “luck out” and be able to redeem the situation, most won’t and the lenders know that they will eventually get your home and you will have maintained the property and kept it insurable while they waited for the market place to pay off your mortgage years early… Then at the right time they will file a foreclosure action and get your home.

In this scenario, they will then put out the money they recover  from your sale and if they can legally pursue you, from you directly, by writing a new mortgage at the higher interest rate plus the fees for writing a new mortgage loan.

 

I’m sure that lenders that do this sort of thing just smile when you take the bait.

Example #2: Get A “Special” Low Rate on an Adjustable Rate Mortgage (ARM)

Another thing that opportunistic lenders may do is to give the borrower an initially lower than current market rate interest rate ARM-type loan when they know that as soon as the interest rate increases, they will be able to declare the mortgage loan to be in default.

This opportunistic scam works because the borrower just barely qualifies at the special low rate and the lender knows that the marginal borrower won’t be able to make the payments anymore and they can eventually foreclose.  See the discussion on the first example above for a more complete discussion of what can happen when an ARM loan gets in trouble.

They set the borrower up to fail because the borrower is just barely qualified to make the loan payments at the low interest rate.  And, they know that there is no way the borrower will be able to make the payments after the loan rate increases unless the borrower’s income situation dramatically increase for the better.

Example #3: Getting A Deflated Appraisal

A third method of creating a “opportunistic loan” is by getting a deflated appraisal.  This is quite complex and requires collusion of at least two parties.  This type of opportunistic loan may be a little easier to get a civil or criminal action in your favor if you are the buyer and a victim because you are not involved.

If you are the buyer and the scam is a deflated appraisal, you will be able to qualify for a much more expensive home than you could otherwise afford as an incentive to be at least a passive participant in the fraud.  But, what comes next, the other two parties won’t tell you about.

In the deflated appraisal scenario, the victim is again put into an ARM-type mortgage that they can just barely afford… Even with the lower appraised valuation.  The buyer is actually a victim here but may be complicit because of the housing situation upgrade… The buyer just doesn’t realize what is about to happen.

In this scam, the victim will get foreclosed just like in the other ARM-type examples above.  But, they will not be willing to blow the whistle on the practice because they realize that they may be prosecutable if the scam ever comes to light.

How To Avoid The Trap

Avoiding the trap is simple.  Never sign a mortgage that is above or at your ability to make the payments… No matter how much you like the house.  Never, take an ARM mortgage unless it is temporary and you know for certain you can and will refinance virtually immediately.

Most people know when a home they want to purchase is out of reach for their financial bracket.  But greed gets the best of them and they get stung.  There is a rule you can use to protect yourself… “If it looks amazing that you can qualify for the mortgage, don’t do it!”

Lenders who engage in opportunistic or predatory lending practices are always looking for the next sucker, don’t let it be you!