Predatory Lending Has It Hurt You?!

What is "predatory" lending?   Predatory lending involves unfair and deceptive lending practices which have specifically targeted borrowers who could not qualify for conventional financing such as seniors with equity in their homes, minority consumers and low income families or individuals lacking a good credit rating.  Originally, as part of the  Federal Fair Housing Act and others, there was intent to prohibit discrimination in home financing by banning "redlining" and providing incentives to lenders to serve minority and low-income areas. Unfortunately what eventually emerged in the lending industry was "reverse redlining" in which the areas and people which had previously been starved for credit and denied loans were flooded with exploitative loan products.  Now today as a result of this, we are bombarded by the media with the current problems associated with "sub prime lending."   Sub prime loans were designed to serve high risk borrowers who would not qualify for conventional, prime loans by charging higher rates and fees.  Not all sub prime loans are predatory, but virtually all predatory loans are sub prime.

In recent years, the parameters of who could be targeted by unscrupulous lenders with sub prime loans expanded.  The dream of home ownership was used to convince buyers that they could afford a loan even if they did not have any money for a down payment or an acceptable credit score. They could get a low introductory "teaser" rate with a variety of variable rate mortgage options and no or little money down and perhaps only pay "interest only" for a period of time.  For lenders to "close the deal" and make their money, the buyers were basically told not to worry about the consequences in a year or two when a variable rate would adjust and  that there would now be a payment of both principal and interest and the loan payment would become much bigger.

Now we are in the midst of investigations regarding culpability.  Who is to blame for the current mess we are in?  It is difficult to just blame the lenders as it is impossible to know how many borrowers willingly participated in being untruthful about their incomes.  How much responsibility does the borrower have to be responsible for in terms of reading the documents for terms and conditions and looking ahead to how much a payment will be when the variable rate changes and/or now they would have to pay both principal and interest?  No one anticipated negative equity.

Perhaps none of these issues directly relate to you but what does?  First and foremost is the affect on home values.  As the number of foreclosures on the market increase, the value of homes has decreased.  When homeowners no longer can afford the mortgage payment on their house, their home has negative equity and they "walk away" sending their keys to their lender in the mail, there is an impact on the rest of their neighborhood as now it has an "abandoned," unkempt property which again affects property values.  The inventory of homes for sale has significantly increased which means that it is more difficult and takes longer for a home to sell.  If you want to buy a home, the timing could be very good because of the choices and prices of homes but you as a buyer may have a much more difficult time qualifying for a mortgage.  As the pendulum swings, before it swung in favor of borrowers and now it is not.  Hopefully a lesson has been learned and it is time for a reality check.  Back to the basics, buy what you can afford, read any document you are going to sign and have a "rainy day" fund in case of an emergency.