Fixing the mortgage system is crucial if we’re to prevent another financial meltdown. If the mortgages are done right than mortgage-backed securities will also be right — and that means there won’t be worries regarding securities ratings or insurance. Lenders will not be stuck with overvalued properties and undervalued paper.

No less important, if we fix the mortgage origination system we will also protect borrowers. No more toxic mortgages which are at the heart of our financial problems.

Here are six steps the borrowers, lenders and government officials can take now, this week, to revamp the mortgage system.

First, in the past year a Nationwide Mortgage Licensing System supported by state regulators and the federal government has begun operations. In essence loan officers now have unique registration numbers even if they move from state to state. This means the name and registration number for a loan officer can be included in mortgage documents — and loan officer performance can then be graded in the same way that we have credit scores. It may well be that prudent investors will not want mortgages included in a mortgage-backed security from loan officers with a score below a certain level — and it may also be that lenders will not want to hire such poor performers. Of course, the same concept of registration and responsibility should be extended to mortgage underwriters.

Second, lending rules must be changed so that loan officers have a fiduciary obligation to borrowers, in the same way that lawyers have an obligation to clients and doctors have an obligation to patients. The creation of a fiduciary obligation for loan officers would mean that aggrieved borrowers could take loan officers and their lenders to court in the event of abuse, a system which seems to work well for virtually every other type of business. Members of the UpFront Mortgage Brokers Association already have adopted this standard and promise that they “will endeavor to act in the best interests of the customer,” disclose their fees up front and credit the borrower for cash they receive from third-parties.

Third, require that all loans be fully documented and that income and employment are verified. This would do away with “stated income” loan applications where lenders do not verify borrower income claims.

Fourth, have HUD set the interest rate and points for FHA loans — and post that information daily online. There’s no reason this can’t be done. In fact, until 1983 HUD actually did set FHA mortgage rates. Borrowers would then have an easy way to follow the market by using FHA rates as a benchmark.

Fifth, predatory lending is NOT a federal crime. Loan fraud — where a lender is abused — is very much a federal crime but predatory lending where a borrower is overcharged by a lender is entirely ignored by federal laws. The next time you hear a politician yammer about “predatory” lending ask if he or she would support a specific federal law against such activities.

Sixth, every mortgage-backed security which has a high level of foreclosures should be audited by the FBI to assure that all loans were properly underwritten. When that’s not the case then appropriate action should be taken against the lender, the loan officer, the underwriter and the Wall Street securities packager who were paid for such work.

Would these ideas work? You bet. Toxic loans would be impossible and there would be real penalties for abusing borrowers and investors.

Mortgage Reform Now — 6 Ways To Fix What’s Broke is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Private mortgages can be alluring and in some cases financially dangerous. In the best case a private mortgage will provide a low rate with little down and fair terms, in the worst case you’ll have a hard-money loan with high interest and huge fees.

On the good side, one can get a mortgage — it’s just a loan — from a friend or a relative. In fact, Virgin Money has a program in place to create such loans with proper paperwork and administration.

Private Mortgages

Private mortgages should be treated just the way that a commercial lender would handle real estate financing. This means there should be an appraisal of the property, the borrower should provide financial information, there should be a formal written loan agreement prepared by an attorney and the loan should be properly recorded.

The reason both buyer and lender want such formalities is very simple: Relationships can change. Verbal agreements can be unclear. When everything is in writing and saved in a business-like manner then the obligations of each party are clear.

Private mortgages do not necessarily have to have the same terms as conventional financing. For instance, there can be loans where interest accumulates and the debt is paid off from time-to-time with lump sum payments. The interest rate can be lower and the qualification terms can be more liberal. With an individual as a lender, it’s actually possible for the debt to be forgiven in a will.

One concern with private mortgages is there length. Rarely can you get a 30-year private loan. Shorter terms are much more common.

I have obtained a number of loans from private sources. These typically are pension funds from law offices and medical practices which hold millions of dollars. The trustee for the fund can sometimes extend mortgage loans, depending on the terms of the pension.

Such extensions of credit are not minor matters. The trustee has fiduciary obligations to the pension and its beneficiaries and must act in a responsible manner. In my situation, there was always a formal settlement with recorded documentation. I am pleased to say that all loans were fully repaid, with interest.

Hard Money Lenders

Less attractive are asset-based loans from hard money lenders. These are typically short-term loans with high interest levels, big fees up front and small loan-to-value ratios — say a loan for as much as 65% of the property’s value.

As with all real estate loans, if the borrower does not pay the property can be lost to foreclosure. Of course, the tougher the terms the more likely default.

For specifics regarding a private mortgage, both lender and borrower should speak with an attorney.

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The government is now trying to stop this problem by requiring lenders to get necessary paperwork up front. This is a smart idea — and it also leads to an important point: Borrowers always want to know what paperwork they’ll need for a loan application so here’s a quick and handy list.

Consumer Debts

You plainly need a list with account numbers, current balances and required monthly payments for all debts, including but not limited to student debts, car loans, credit cards and other outstanding obligations.

Assets

You must show all assets including but not limited to savings accounts, mutual funds, stock, partnership interests, real estate and other assets.

Income

Below is the income documentation list that HUD is requiring for borrowers who are seeking to avoid foreclosure through the government’s making Home Affordable program. While the requirements below may not work for every lender, the list is an excellent start and shows what lenders are likely to require when you apply for a mortgage.

Employment Income

Copies of two recent pay stubs, not more than 90 days old at time of submission, indicating year-to-date earnings.

a. Servicers may accept pay stubs that are not consecutive if, in the business judgment of the servicer, it is evident that the borrower’s income has been accurately established.

b. When two pay stubs indicate different periodic income, servicers may use year-to-date earnings to determine the average periodic income, and account for any nonperiodic income reflected in either of the pay stubs.

c. When verifying annualized income based on the year-to-date earnings reflected on pay stubs, servicers may, in their business judgment, make adjustments when it is likely that sources of additional income (bonus, commissions, etc.) are not likely to continue.

Self-employment Income

The most recent quarterly or year-to-date profit and loss statement for each self-employed borrower. Audited financial statements are not required.

Other earned income (e.g., bonus, commission, fee, housing allowance, tips, overtime)

Reliable third party documentation describing the nature of the income (e.g. an employment contract or printouts documenting tip income).

Benefit Income (e.g., social security, disability, death benefits, pension, public assistance, adoption assistance.

Evidence of:

(i) the amount and frequency of the benefits such as letters, exhibits, a disability policy or benefits statement from the provider, and

(ii) receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If a benefits statement is not available, servicers may rely only on receipt of payment evidence, if it is clear that the borrower is entitlement is ongoing.

Unemployment Benefits

Evidence of the amount, frequency and duration of the benefits (usually obtained through a monetary determination letter). The unemployment income must continue for at least nine months from the date of the application. The duration of benefit eligibility — including federal and state extensions — may be evidenced by a screenshot or printout from the Department of Labor UI benefit tool, which is available at http://www.ows.doleta.gov/unemploy/ben_entitle.asp.

Rental income

Rental income is generally documented through the Schedule E –Supplemental Income and Loss, for the most recent tax year.

a. When Schedule E is not available to document rental income because the property was not previously rented, servicers may accept a current lease agreement and bank statements or cancelled rent checks.

b. If the borrower is using income from the rental of a portion of the borrower’s principal residence, the income may be calculated at 75 percent of the monthly gross rental income, with the remaining 25 percent considered vacancy loss and maintenance expense.

c. If the borrower is using rental income from properties other than the borrower’s principal residence, the income to be calculated for HAMP purposes should be 75 percent of the monthly gross rental income, reduced by the monthly debt service on the property (i.e., principal, interest, taxes, insurance, including mortgage insurance, and association fees, if applicable.

Alimony, Separation Maintenance, and Child Support Income

Borrowers are not required to use alimony, separation maintenance or child support income to qualify for HAMP. However, if the borrower chooses to provide this income, it should be documented with:

(i) copies of the divorce decree, separation agreement or other legal written agreement filed with a court, or a court decree that provides for the payment of alimony or child support and states the amount of the award and the period of time over which it will be received, and

(ii) evidence of receipt of payment, such as copies of the two most recent bank statements or deposit advices showing deposit amounts. If the borrower voluntarily provides such income, and that income renders the borrower ineligible for a HAMP offer, the servicer is allowed to remove that income from consideration and re-evaluate the borrower for HAMP eligibility.

20% Threshold for Passive and Non-Wage Income

Notwithstanding the foregoing, passive and non-wage income (including rental, part-time employment, bonus/tip, investment and benefit income) does not have to be documented if the borrower declares such income and it constitutes less than 20% of the borrower’s total income.

Non-Borrower Income

Servicers should include non-borrower household income in monthly gross income if it is voluntarily provided by the borrower and if, in the servicer’s business judgment, that the income reasonably can continue to be relied upon to support the mortgage payment. Non-borrower household income included in the monthly gross income must be documented and verified by the servicer using the same standards for verifying a borrower’s income.

Association Fees

If a borrower has indicated that there are association fees, but has not been able to provide written documentation to verify the fees, the servicer may rely on the information provided by the borrower if the servicer has made reasonable efforts to obtain the association fee information in writing.

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This is an unhappy statistic, but it does not tell the whole story. First, as the FBI explains, “the total dollar loss attributed to mortgage fraud is unknown.” This makes much sense given that fraud cannot be known until it’s uncovered — think of Bernie Madoff, Enron and Worldcom.

Second, there’s no central repository to collect mortgage fraud complaints thus the counting and definitions of one source may be different than another.

Third, and most importantly, the FBI report does not cite ONE instance of predatory lending.

Could it possibly be that in a one-year period there was not a single predatory loan issued anywhere in the US?

You’re kidding, right?

Predatory Lending Is Not A Federal Crime

The reason there are no predatory loan statistics in the FBI report is very simple: Although most mortgages originate from nationally-regulated lenders, predatory lending in not a federal crime so there are no statistics to report.

As Benny Kass explains, “there are no federal laws making predatory lending illegal.” Kass is a long-time real estate columnist with The Washington Post and a well-regarded real estate attorney.

In other words, if you make a material misstatement, misrepresentation, or omission on a loan application that can be regarded as mortgage fraud. However, if a lender sells a subprime loan to a family that qualifies for a prime mortgage and increases their housing costs by thousands of dollars per year, that’s just dandy — even if it drives them into foreclosure and bankruptcy. No crime there, no obligation to do what is best for the borrower.

Suspicious Activity Reports (SARs)

The FBI report reflects Suspicious Activity Reports (SARs) rather than actual fraud cases. Given that millions of loans are originated each year the number of fraud prosecutions is tiny. As the FBI reports, last year — in fiscal 2007 — there were 1,204 mortgage fraud cases. They produced 321 indictments and 260 mortgage fraud convictions.

The point, of course, is that the FBI cannot go after predatory lenders if predatory lending is not a crime. Can you guess which industry has worked zealously to assure that mortgage fraud is an issue — but predatory lending is not?

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It’s a political question, of course, and when the time came for the Senate to vote in April the count was 51-to-45 against a measure would give judges the right to change home loan terms and rates. For the moment at least, S.61, the Helping Families Save Their Homes in Bankruptcy Act of 2009, is dead.

Or is it?

In reality the Senate vote was just one battle in a war which is going to last for many months. As Sen. Richard Durbin (D-IL), the bill’s sponsor, told The Washington Post that “I’ll be back. I’m not going to quit on this.”

But opponents, according to Forbes magazine, “argued that allowing judges to unilaterally adjust the terms of mortgages (or “cram down” the mortgages, as the financial services industry says) would create an alarming precedent, undermining existing principles of contract law. Eventually, they said, lenders would have to raise mortgage rates for everyone to cover losses forced on them by bankruptcy judges.”

Really? An alarming precedent? Undermine contract law?

This is nonsense.

The truth is that until the Supreme Court’s Nobleman case of 1993, bankruptcy courts routinely changed rates and terms for home mortgages. Contract law was not undone, there were no alarms and the country did not implode into a lawless mass.

With Nobleman, however, the Supreme Court said that bankruptcy judges could not change the terms of first liens on a residential property. They could, however, change the terms on first liens secured by vacation homes, yachts and private planes.

In other words, there is NO centuries-long precedent which says we can’t go back to what we were doing in 1993 except that the banks and credit card companies would be offended. There’s no reason why the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 cannot be undone — this was legislation which says that before a homeowner can file for bankruptcy he or she must first have six-months of financial counseling. In other words, by the time the borrower meets the counseling standard the home has already been foreclosed.

Do you think the Republican House, the Republican Senate and the Republican President who passed this bill in 2005 did not know this? Do you think they did not know that they were making student loans life-long debts that were virtually impossible to relieve through bankruptcy? Or making credit card debt virtually impossible to modify?

Don’t be fooled. Fixing the bankruptcy system does not involve breaking any sort of precedent. There’s no cause for alarm. There’s merely a need to get fairness and balance back into the legal system.

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To resolve this mystery, let’s go back to the 1970s when the mortgage-backed security — the MBS — was developed. The MBS was a financial device designed to resolve a problem for investors. The problem? Imagine that you’re a loan investor and bought the mortgage on a single-family home. Your total income from the investment would be impacted if your one borrower was late, didn’t make a payment or was foreclosed.

With a MBS you own a security which is supported by a large number of mortgages, perhaps thousands. If someone misses a payment your income continues with little disruption.

In theory mortgage-backed securities make a great deal of financial sense.And in practice, until the past few years, mortgage-backed securities worked well.

Today mortgage-backed securities are troubled, especially those which include subprime loans. But why should this be? Even with subprime loans, the overwhelming majority of borrowers are making their payments.

About as good as an answer as you’ll find comes from Lew Ranieri, one of the developers of the MBS concept. As Ranieri told John Cassidy in The New Yorker, today MBS securities are fundamentally different from the paper that was invented several decades ago.

“They have created the perfect loans,” Ranieri says with irony of today’s mortgage-backed securities. “They didn’t know what the home was worth, they didn’t know what the borrower earned and the borrower wasn’t putting any money into the purchase. The system had gone completely nuts. A loan without a full appraisal, thorough underwriting, and full income verification was never what anyone envisioned when we started the market for mortgage-backed securities.” (See: “Subprime Suspect,” March 31, 2008)

You listen to Ranieri and it becomes obvious why mortgages have been so freely-available during the past few years. The answer has nothing to do with a push for more homeownership or some sort of philosophical imperative: If Wall Street is going to sell more high-profit mortgage-backed securities it needs a basic feedstock. What is that feedstock? More loans.

If it happens that a mortgage fails, who suffers? The loan officer has already been paid. The “lender” is often not a lender in the sense of a company with a vault stuffed with cash, but instead a retailer that instantly re-sells any loan it originates. If the borrower makes payments for a few months, the originating lender is then largely not responsible if the mortgage goes downhill.

With mortgage-backed securities the folks on Wall Street make money selling paper, real estate brokers make money selling homes, governments make tax money every time a home is sold or refinanced, title companies and attorneys make money with each closing. The list goes on but you get the idea.

What started out as a conservative way to protect investors morphed into something strange. You could buy a typical MBS or you could get a little more interest if you bought a somewhat riskier portion of a mortgage-backed security. But why worry — credit-raters gave MBS paper strong marks.

Unfortunately, the push for higher returns outpaced the push for financial sanity. Loans without full appraisals, stated-income mortgage applications, exploding ARMs, option ARMs and large numbers of interest-only loans will inevitably produce large numbers of distressed borrowers and outright foreclosures. Add in a gross lack of federal regulation — regulation that could easily have prevented the current mortgage meltdown — and the results we see today were pre-ordained.

Once a few mortgage-backed securities failed it meant that the assumptions used to value and rate all MBS paper needed to be reviewed. The value of MBS paper fell, so investors suddenly had less net worth and thus a lot less interest in once-attractive mortgage-backed securities.

For the folks on Wall Street, the problem was not lower MBS ratings but fewer MBS buyers. Essentially, brokerages and investment banks got caught with MBS and other sagging securities in their portfolios.

And this gets worse. There are not only mortgage-backed securities (MBS) and collateralized debt obligations (CDOs — securities backed with a variety of debts, including mortgages), there are also derivatives.

Derivatives are simply bets. While there is a limit to the number of MBS and CDOs you can have, there’s no limit to the number of derivatives. The value of these derivatives amounts to hundreds of trillions of dollars.

The good news? Most derivatives are hedged so that the investor has little financial exposure. The bad news? When you deal with hundreds of trillions of dollars a minor “whoops” can be worth billions and billions of dollars.

And that’s how a few foreclosures upset the strange world of mortgage-backed securities, CDOs and derivatives.

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Published originally by The Real Estate Professional and posted with permission.

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Now a study by the Government Accountability Office says new standards of consumer education should be required for “alternative mortgage products” or “AMPs” — that’s a fancy term for interest-only loans and option ARMs.

What’s the problem?

Today’s paperwork simply does not work with interest-only and option ARMs. For instance, a typical disclosure statement might say that monthly payments may rise or fall. Such language is literally true — but artfully does not disclose the magnitude of potential payment increases, the idea that monthly payments might double in a few years.

Federal rules at this time do not require special disclosures for interest-only mortgages or option ARMs. Ads for such loan products often focus on low-up front costs rather than all loan terms. When higher monthly costs kick-in borrowers may be faced with stark and unexpected financial choices.

“Although AMPs have increased affordability for some borrowers, they could lead to increased payments or ‘payment shock’ for borrowers,” says the GAO.

The result for many borrowers is that “unless the mortgages are refinanced or the properties sold, AMPs eventually reach points when interest-only and deferred payment periods end and higher, fully amortizing payments begin.”

But what if loans cannot be refinanced? What if properties cannot be sold for enough to pay-off bigger loan balances? As we are seeing, home values do not always rise.

“Many buyers are purchasing with little or nothing down,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the largest online marketplace for foreclosure properties. “Buyers with nontraditional financing in a slow or declining market could easily find themselves with a home which has actually lost value while the mortgage balance has grown substantially.

“After a few years a buyer could be stuck with unaffordable monthly costs plus a home that cannot be sold for enough money to pay off the mortgage. When you look at the risks associated with interest-only mortgages and option ARMs — loans that together now represent more than 70 percent of all new mortgage originations — you have to wonder why more disclosure is being studied and debated when the immediate need is obvious.”

Once “start” rates for interest-only and option ARMs end a significant number of borrowers will be unable to make monthly payments. How many borrowers? No one knows.

“Because the monthly payments for most AMPs originated between 2003 and 2005 have not reset to cover both interest and principal,” explains the GAO, “it is too soon to tell to what extent payment shocks would result in increased delinquencies or foreclosures for borrowers and in losses for banks.”

Put it all together and you have armies of borrowers with loans they don’t understand. In too many cases, you also have borrowers with loans they will be unable to repay.

A borrower with option financing can typically make monthly payments sufficient to amortize (pay off) the loan in 30 years. Or, by making bigger monthly payments, the borrower could pay off the entire loan in 15 years.

Alternatively, option financing also allow the borrower to make interest-only payments during the first few years of the loan term. Lastly, option financing allows borrowers to make low payments during the first years of the loan that do not even cover the cost of interest. The interest not paid is added to the loan balance each month, a process called “negative amortization.” Of course, as the debt grows so do interest costs.

The GAO offers this example:

Someone gets a $400,000 option ARM. The loan has a 4.41 percent initial interest rate, however during the five-year start period the borrower can pay as if the interest level is just 1 percent. Required monthly payments during the start period can be increased no more 7.5 percent a year.

Here’s how the monthly payments and loan balance change for a borrower who only makes the minimum payment.

If you look at the chart you can see that by the start of the sixth year the monthly payment has more than doubled. However, an option ARM is an adjustable-rate loan product. The chart assumes that the interest rate does not change. In the real world, the interest rate over a five-year period could easily rise or fall. If it falls, no problem. If rates rise, then negative amortization could increase substantially and future monthly payments would rise sharply.

“There’s no reason lenders cannot offer clear and concise brochures that explain the pros and cons of nontraditional financing,” says RealtyTrac’s Saccacio. “Such disclosures could detail how interest-only and option ARM financing increase affordability. With equivalent space and the use of clear charts and graphs the same brochures could also describe the potential costs and risks.

“Current loan disclosure forms do not fully outline the potential risks associated with interest-only mortgages and options ARMs,” he continued. “Even if borrowers read today’s disclosure forms from end-to-end they will not find needed loan information or illustrations. The result is more risk for borrowers — and that means more and unnecessary risk for lenders and mortgage investors.”

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Published originally by RealtyTrac.com during October 2006 and posted with permission.

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That, however, does not seem to be the case. Lender after lender is cutting back. Today we have lenders who are requiring more money down in distressed areas, slashing access to existing home equity lines of credit, dropping subprime and Alt-A loans and inventing new fees for the few loans they actually originate.

You’re now going to hear a lot of pleas to loosen credit standards. Easy money, it will be said, is the sure way to boost home sales. Such arguments sound great and used to make a lot of sense except for one problem: Loose credit standards — coupled with docile federal regulation that failed the public — played a central role in creating the mortgage meltdown.

Until four or five years ago, whoever heard of the widespread use of stated-income loan applications? Does anyone think that reduced underwriting standards make loans less risky or that interest-only mortgages or option ARMs are really good for many borrowers?

In the same way that yesterday is not coming back, neither are the lending standards that were in place between 2002 and 2007. Instead we are about to see something new: lenders who lend less, builders who build smaller and borrowers who want less debt.

Some will see these shifts as frightening because the old order is about the change, but the better strategy is to see that a new reality is dawning — one with fresh opportunities for income and profits.

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Published originally by Realty Times on April 30, 2008 and posted with permission.

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In general terms predatory loans can be seen as financing which the borrower does not understand, cannot repay, or includes terms so onerous even loan sharks would be embarrassed. Such loans harm consumers, generate grossly high foreclosure levels and hurt legitimate lenders.

Sometimes predatory loans are confused with flipping, buying a home and quickly selling for a higher value.

Flipping — by itself — is neither wrong nor disturbing. Consider the parallel: if someone buys a stock Tuesday for $10 and sells it Wednesday for $15 no one gets distressed. Where flipping goes wrong is when it relies on pay-offs to appraisers, crooked loan applications, dishonest loan officers, cheating lenders, and fraudulent contracts. We don’t need further protection against unlawful flipping, all we need is to enforce the rules now on the books.

Predatory loans are troublesome because they may not be illegal today. Instead, they’re often loans made to those who are poor, sick, uneducated, ignorant or elderly — people who pay far more than they should for financing secured by real estate.

If you look at the Home Ownership Equity Protection Act of 1994 (HOEPA — Section 32 of Regulation Z, part of the Truth in Lending Act) you can see the problem: According to the Federal Trade Commission, a loan is covered by the law if it meets the following tests:

• For a first-lien loan, that is, the original mortgage on the property, the annual percentage rate (APR) exceeds by more than eight percentage points the rates on Treasury securities of comparable maturity;
• for a second-lien loan, that is, a second mortgage, the APR exceeds by more than 10 percentage points the rates in Treasury securities of comparable maturity; or
• the total fees and points payable by the consumer at or before closing exceed the larger of $561 or eight percent of the total loan amount. (The $561 figure is for 2008. This amount is adjusted annually by the Federal Reserve Board, based on changes in the Consumer Price Index.) Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees.

There are three problems with Section 32.

First, Section 32 requires disclosure for onerous loan terms, it does not ban such financing.

Second, as I read Section 32 it allows loans with awful terms and no disclosure, say 7.99 percentage points above the rates on Treasury securities of comparable maturity — plus 7.99 points.

Third — and you’ll love this — a huge percentage of all real estate loans are excluded from Section 32 regulations! As the FTC states, “The rules do not cover loans to purchase or initially construct your home, reverse mortgages, or home equity lines of credit (similar to revolving credit accounts).”

What to do?

Look at the money.

Predatory lenders are motivated by money. The way to stop predatory lending is to cap the money that can be made and impose significant consumer protections.

For instance, a $100,000 mortgage at 6.5 percent and no points (par pricing) over 30 years yields interest worth $127,545. But not all loans are available at 6.5 percent because not all borrowers have pristine credit.

Okay, let’s say that 6.5 percent is the base rate for loans originated today but that rates as high as 12 percent and no points (50 percent greater) will be allowed. That means a $100,000 loan over 30 years would have a projected interest cost of $270,300. Any loan with a higher projected yield — including interest, points, loan discount fees, origination fees, and other payments to a lender (or any party related to or controlled by the lender) — will be defined as “predatory.”

And what state or federal penalties should we have for predatory lenders? How about a mandatory 50 percent reduction in the principal amount and an interest rate no greater than half the highest allowable charge at the time a predatory loan was originated? Why golly, in the example above we would have a $50,000 loan at 6 percent — less any fees or excess interest paid to date, of course.

We can debate the percentages and penalties, but the principle concern is that we should be able to easily determine what is or is not a predatory loan — and then do something about it.

Foreclosures for predatory loans with less than six months notice should be made illegal.

Late fees of any sort for predatory loans should be banned.

Predatory rates that escalate from initial levels should be forbidden.

In the event of a dispute predatory lenders must be required to bear their full legal costs. If a predatory lender loses a court case, mediation or arbitration, it should also be required to pay the borrower’s legal fees and costs.

Related costs for loan “insurance” should be included within the yield computation (don’t worry, FHA, VA, and private mortgage insurance companies want nothing to do with predatory loans).

Borrowers should have the right to pay off predatory loans at any time and without penalty.

No cash from predatory loans should be provided to consumers for “home repairs” during the first three years of the loan term This would impact “contractors” who offer to both fix the property and provide cash to owners — but forget to mention that the deal is powered by a predatory loan.

A 30-day mandatory disclosure period would be established for predatory loans — and consumers would not be allowed to waive their disclosure rights. Borrowers would have the right to withdraw from the loan without cost or penalty during the disclosure period for any reason — or for no reason.

And, of course, such rules should apply absolutely and equally to purchase money mortgages, first trusts, second loans, refinancing, construction financing, reverse loans, and home equity lines of credit — any financing secured by a prime residence.

HUD, the Federal Reserve, or the FTC can publish a daily base rate that borrowers and attorneys can check to see which loans are predatory and which are not. Such rates can be drawn from data developed by an accepted financial publisher, such as HSH Associates, a company that surveys thousands of lenders each week.

The lending industry is filled with people who are just like the rest of us — they want to earn a fair profit from the provision of a legitimate service. But predatory lending hurts consumers and damages lenders, it’s a loser for everyone and it’s long past the right time to get it stopped.

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Published originally by Realty Times on June 20, 2000 and posted with permission.

What To Do About Predatory Loans is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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First, you must not have owned real estate within the past three years. (In effect, you can be a “first time” buyer more than once.) This standard can pose some difficulties in divorce situations where spouses once owned property jointly but now wish to buy individually. See program rules for details.

Second, state programs often have income ceilings. If you earn too much, you may not qualify even though you have not owned property in the past. The theory is that those with high incomes have a variety of mortgage options not available to many first-time buyers.

Third, program funding tends to be limited. This means first-time buyer programs are operated on a first-come, first-served basis. Once program funds are gone, it can take weeks or months until additional monies are available.

For details, speak with local brokers and lenders. It’s a good idea to obtain all necessary forms in advance to see what information is required for participation. It’s also a good idea to assemble all required paperwork in case it’s necessary to quickly turn around an application.

How Do I Qualifying For First-Time Buyer Programs? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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