Beware of Predatory Lending!

Predatory lending is a term often associated with short-term consumer financing options such as payday loans, but it's prevalent in the home loan realm as well. In fact, mortgage fraud is rampant these days. At best, these practices are annoying to potential victims, but for the actual victims, the end result could be far worse: the loss of a home, financial catastrophe, the destruction of hard-earned credit scores.With that in mind, it's vitally important to choose the right lender and remain fiscally secure.

We've taken a look at some common predatory lending practices to alert prospective borrowers to the warning signs before they're victimized. It's vital that you know how to protect yourself, and know where to go if it's already too late for that.Current homeowners seeking refinance options are at greater risk of fraud than regular home loan seekers, but no one is immune by any means. At particular risk of mortgage scams are any buyers who, due to credit issues or self-employment status, must rely on subprime lending.Also at risk are those seeking to buy in neighborhoods that have been red-lined (read: greatly discriminated against) by conventional lenders.

Almost by default, a buyer in this kind of area, which is likely low-income and in need of some serious housing overhaul, is placed at the mercy of subprime lending providers.But it goes beyond that.There are many people involved in fraudulent, predatory practices, ranging from large and well-known banks, loan servicing companies, small-time con men who once hocked aluminum siding and water filtration systems door-to-door, corrupt loan originators working for otherwise legitimate firms, jaded real estate attorneys, builders, agents, and more.THE

BOTTOM LINE: Predatory lending is profitable, and more opportunists are always coming out of the woodwork. Here's a short list of predatory practices.

The Classic Bait & Switch. This commonly-used term comes from numerous retailing industries, where a great sale on a plasma TV or new car gets buyers to come down to a store, only to find out that the item is sold out or the sale no longer applies. However, the retailer has something “almost as good” that he'll give you a good deal on to make up it. The practice is common in the mortgage field as well. A borrower commits under a set of terms -- a certain interest rate, a fixed - or adjustable-rate mortgage with a specified time frame and adjustment index, loan duration, etc. Then, at closing, the borrower realizes the documents specify a higher rate, a different adjustment, a five-year note with a balloon, or other terms to which he had not agreed. The loan originator does not answer his phone. The sellers are beginning to look real unhappy. Under pressure and distraught, the borrower signs the documents and swears he will get the mess straightened out. But with the papers signed, it is now a legal issue that takes time, money and perhaps courts to resolve. If you think this could never happen to you, a California study of 125 people who used subprime lenders reported that 70 percent of borrowers said that at least one key of their loans changed negatively at closing.

Lending More Than a Borrower Can Afford. It happens more often than you might think -- a lot more often. You’ve seen the ads in your email box or on late night TV for sure.

· Borrow 125 percent of your home’s value!
· Use your house to buy a new [insert car, yacht, home entertainment system, dream vacation or other indulgent purchase here].

While these can be classified under aggressive solicitation, they are also part of a more devastating practice. Purposely granting and/or structuring a loan with monthly payments in excess of what a client can reasonably be expected to pay is probably as bad as it gets. An over-the-top loan-to-value ratio is all but guaranteed to get you in trouble, but there are other things to watch out for on top of that.

Disregarding Income and Debt, for one. Bad lenders ignore the conventional guidelines regarding the borrower’s ratio of debt to income, or the level of income itself. If a borrower is lined up to pay 55 percent of his income to PITI, for instance, default is all but guaranteed. Negative amortization is now illegal in many states, and should be in all of them, but lenders can usually get away with closing these deals with an uninformed borrower, and with little risk of prosecution. With a "neg am," the borrower is required to pay less than the amount due each month, with the balance being tacked on to the principal. At some point, that swollen principal will come due. Which means disaster in most cases.

Interest-Only Loans. Zero amortization is less dangerous than negative amortization, but both Florida home loans are a recipe for disaster. In both cases, the borrower makes a minimum payment for a period, covering interest but paying nothing toward principal. After 5-10 years, payments are accelerated to cover both interest and principal.A lender usually does this to virtually insure that the borrower will fall into default, and when that inevitably happens, the lender is the first to know and can approach a customer to offer refinancing to bail them out of the jam. How convenient. Under any of the above scenarios, a borrower might refinance 2-3 times before ultimately losing the house to foreclosure or being forced to sell, losing most or all his equity in the process and walking away virtually empty handed.