The American Dream or Nightmare?

WASHINGTON- What exactly is predatory mortgage lending and whom does it affect? Given the obvious terminology surrounding it, most people might believe that only the most disadvantaged borrowers fall prey, but that is not true. Some predatory practices include: the bait and switch, or quoting an initial low rate that increases as much as 1% every six months; up-front fees that sometimes equal 10% of the loan amount; onerous prepayment penalties; "packing" or rolling unnecessary credit insurance premiums into the cost of the loan; negative amortization, where the principal of the loan actually grows over time; balloon payments required before a seven-year period and "flipping" or the refinancing of the same loan many times over. Often, these techniques originate with bogus "home improvement" plans targeted against the elderly and the financially unsophisticated in minority neighborhoods. (CU Times featured one woman's story in the Feb 18, 1998 issue.) The need for financial education is a prime reason so many consumers are hurt. On April 4, Treasury Secretary Lawrence Summers spoke to the dual issues of education and the need for a higher savings rate. CUNA was named to a coalition whose goal is to increase financial literacy through high school programs and other outreach efforts. All these practices, either together or separately, can result in homeowners losing the equity they have built up in their homes. Once the equity is "stripped" the lender forecloses on these borrowers. According to Housing and Urban Development Secretary Andrew Cuomo, such tactics represent the "downside of of an economic boom that has produced the highest homeownership rate in history." And Fannie Mae Chairman Franklin Raines recently stated that half the borrowers who receive such high cost loans qualify for a traditional mortgage. -caburger@cutimes.com