Loan Scams Target Homeowners With Equity

If you’ve got dings or dents in your credit and you want to borrow mortgage money, remember the name Essie Goodwin. A 61-year-old widow and retired federal employee who lives in Washington, Goodwin faced a cash squeeze during the refinancing boom of 1993.

She needed money to fix her home and to pay off debts. A local mortgage broker approached her with a combined home improvement-debt consolidation offer that would put a new first mortgage on her house with a monthly payment less than her current automobile payment of $495.

It all sounded fine to Goodwin. But tucked away in the boilerplate print of the closing documents she signed were facts about the loan that she didn’t comprehend until weeks later: The mortgage’s note rate was 24%. Total fees and commissions came to 10 points. (A point equals 1% of the loan.) The effective annual percentage rate (APR) was 36%. Monthly payments were $700, not $495, and the term was 12 months, not 30 years.

With a monthly retirement income of $1,215, Goodwin’s new mortgage could have bankrupted her quickly. Fortunately, she got a lawyer who persuaded the broker to restructure the loan to 8%, no points and $296 a month.

Extreme as her case sounds, Goodwin is hardly unique, according to a new national survey of legal aid attorneys conducted by Public Citizen, a consumer group that has lobbied Congress to toughen up federal protections against home mortgage rip-offs.

The study found that legal aid attorneys in 25 states report receiving more than 5,000 complaints of rate- and fee-gouging by loan sharks who target homeowners with high equity balances but sub-par credit situations.

Although the study focused primarily on low-income, urban homeowners, mortgage industry executives confirm that middle- and upper-income borrowers with spotty credit can be equally vulnerable.

For example, one San Francisco-area mortgage broker, who asked not to be identified, says he recently refinanced a local businessman who had several hundred thousand dollars of equity locked up in his home, but needed $100,000 in cash quickly--”within four or five days”--to make a payment related to his business. He went to a firm that advertised fast turnarounds and came away with the following deal: A 14.95% note rate, 10 points in fees and commissions, and a prepayment penalty hidden in the note documents requiring six months interest for an early payoff.

“The guy ended up paying $125,000 for the use of $100,000 for five weeks,” said the mortgage broker who refinanced him out of the deal with a 30-year loan under 9%.

Mortgage consultant Allen C. Hardester Jr. of Columbia, Md., says rip-off loans are a multibillion dollar national industry, targeted on credit-impaired homeowners “who simply don’t understand that legitimate, fairly priced mortgage money sources exist for them.”

How do you know what you should pay as an applicant with credit problems in this fall’s mortgage marketplace? Hardester offered the following three-tiered guidelines:

--For borrowers in the most vulnerable category--those who are in danger of foreclosure after missing several mortgage payments but who have sizable equity stakes--immediate preventive steps are necessary.

Since your current lender probably has given up on you, says Hardester, you need to pull out the Yellow Pages or talk to a local nonprofit credit counseling service--”not a for-profit credit repair service”--and ask for the names of lenders specializing in sub-par credit situations.

The rapid recent growth in the so-called “B and C” mortgage market for financially pressed borrowers, he says, “means that the price you’re going to pay (for refinancing) is lower than it’s ever been in relative terms.”

What sort of competitive price should you expect if you’re what lenders call “two or three down”--you’ve missed two or three payments? Hardester says 13 1/2% to 14 1/2% plus two points should be the maximum in the current market.

--For borrowers with more moderate credit problems--a record of multiple late payments rather than non-payments--Hardester says energetic shopping should yield you a loan at 11 1/2% to 12 1/2% with two points.

--Finally, for borrowers with just a few credit dings--a couple of late payments and a high household debt-to-income ratio--Hardester says 10% to 11% should be the max.

The key to avoiding a rip-off: No matter how messy your credit may seem to you, the new, highly competitive marketplace for sub-par credit applicants may be able to bail you out.

And the low teens--not 20% to 30%--should be the most you pay.