Less than two decades ago, it was very difficult for those in society with bad credit, or low credit, to buy or refinance a home. However, once the market was introduced to them, subprime loans have nearly dominated the real estate market; although their loans have shockingly high interest rates, the subprime lending companies allow almost instant qualification. As if this wasn’t an already shady looking venture, most feel the need to say, “And then came the really big scam artists!” The suddenly widespread access to credit, for an unrealistic, and unfair fee, has opened a market full of get-rich-quick gurus, con artists, and a never ending succession of lies, and possibly even illegal assistance, such as that some independent subprime lenders do not require any documentation, from say, an illegal immigrant.
Subprime predator lenders, as found in a study made by CRL, or, Center for Responsible Lending, are accountable for costing homeowners over nine billion dollars, each year.
Subprime lending companies, target the elderly, low income Latinos, African-Americans, Caucasians, single women, and newly wed couples. These social groups are less likely to qualify for traditional or prime loans, by variants of their circumstances; consequentially, they are seen as less sophisticated by the subprime lending market, to speak plainly, not as intelligent, and therefore easier to be taken advantage of. The statistics following, are not a support to the perceptions of the predatory subprime lenders, it is merely statistical evidence that these social groups mentioned are the people with the most attention being paid to them. If you focus on a social group with persuasive enough advertising, custom made to appeal to the type of people being advertised to, naturally, the objective to acquire those clients with be met eventually.
As ugly a fact as it is, statistics such as age, race, and gender are often very important elements in whether or not an applicant will receive a prime loan, or whether they will be saddled with the task of finding financial assistance elsewhere; elsewhere is usually just opening a door to the first subprime loan shark that promises the unattainable, will become attainable. Five years ago, African-Americans were almost four times more likely to acquire a subprime loan as Caucasians were, and over four times more likely to receive a refinance loan from a subprime lender. Hispanic-Americans, and Latin-Americans, were two and a half times more likely to receive subprime loans and refinancing as Caucasians. According to the FFIEC, the Federal Financial Institutions Examination Council, three years ago, the over priced subprime loans represented more than half of the refinances to African-Americans, a quarter of those to Latin, and Hispanic Americans, and just over a tenth of those refinances were to Caucasians. Subprime mortgage loans default, and go into foreclosure ten times more often than prime loans, and as many as one in five homeowners will be foreclosed on.
One of the basic scams a subprime lending company use against their own applicants, is excessive fees, often disguised or hidden by the lending companies, so that the borrower doesn’t even realize they are making the added payments. Also, eighty percent of subprime mortgage lenders charge prepayment fees, whereas less than two percent of prime lenders, in the mainstream market charge prepayment penalty fees. They also implement what are called “yield spread minimums” which basically act as commissions to the subprime lending company broker who gave the loan in the first place. Which basically means, that the more the broker charges the borrower, the more the broker makes off the loan. Another scheme that subprime lender parasites use, is referred to as “loan flipping,” which is the act of convincing a borrower to refinance with the same lending company, with the promise of a new and less costly fixed rate. However the fee to refinance is usually more than it would cost to go on paying the old mortgage plan. Then of course, there are the products that are sold along with the loan, such as unnecessary insurance. Another popular scheme is mandatory arbitration, which is a clause against the borrower being able to seek legal help, or sue, in the case that the borrowers discover discrepancies that, in any other scenario, would demand legal action.
The tactic of “steering” has been noted previously. It is basically when a subprime lending company targets minorities, low income families, and communities, with advertising and solicitors. The DHUD, or Department of Housing and Urban Development points out that many of the loans made by subprime lending companies are made out to borrowers without any thought to the income of those applying for the mortgage loan. Other and more typical tactics are, selling houses for more than what they are worth with false appraisals, encouraging borrowers to lie about their income, cash available, and expenses, and pressuring borrowers to take high risk loans, such as balloon loans, or interest only payments.
There are very effective ways to avoid being drawn into the subprime lending scam, and not just “avoid”, but correct, and find an alternative route. For instance, before one buys a home, one should attend a home ownership education course. They are offered by the HUD, non-profit, and offer counseling as well. Interview more than one real estate agent, but not two or three, meet with several, and make certain they’re professionals; some of the amateurs are new to the business, and can lead you astray. Hire a licensed inspector to grade the home you intend to buy, before you are obligated to buy. Shop for lenders; the key to this, is that lenders are plural. If anyone tries to steer you towards one in particular, be suspicious. Never, ever let anyone persuade you to lie on your loan application, for any reason, about any subject; false statements on the application constitute as fraud, and you may suffer legal penalties. Never let anyone persuade you to borrow an amount of money that you cannot pay at the present; counting on future plans go awry, and result in the foreclosure of your home. Never sign a document that contains “blanks”; blank lines, blank amounts, blank names, blank dates…. Never. Read everything no matter how small the print, or how tedious. And if it’s too much, get a professional outside opinion. If the cost of home improvement goes up after you refuse to accept the contractor’s financing, be suspicious. Never lie about your intent to live in a house, if you intend to restore it, then resell it, or rent it out; that act does violate federal law. Anything you are unsure about, can always be answered by a professional, even if it takes a while to find one. Most importantly, don’t rush your decision to buy a home. Things will come together when the time is right.