Predatory Lending..."The Equity Killer"

Protect Yourself
Against Predatory Lending..."The Equity Killer"

A Key To Wealth Building
Predatory Lending is the equity killer. Consumers can lose equity in their homes by being placed in higher rates than they qualify for, by paying junk fees that are financed in the loan, by being placed in bad loan programs, etc. Predatory Lending, simply stated, is the practice of unfair lending. Predatory Lending victimizes hundreds of thousands of families every year. For the past 3 years Fair Community Lending Services has worked to protect consumers against predatory lending through education, access and accountability.

So what is Equity?

Equity is your ownership in the property you own also known as your asset position. A mortgage is your liability. So as shown in Example 1, if your home is worth $300,000 and you owe $200,000 to the bank, the equity remaining in your home is $100,000. Your equity is available for you to turn to cash by either selling your home or refinancing your home.

Example 1:
Value of Home: $300,000
Liability/Amount owed to Bank: $200,000
Equity = Value of Home – Amount owed/Liability: $100,000

If you decide to sell your home you will have to pay off the amount owed to the bank and any remaining money would come to you after you pay the fees to sell your home.

You can also gain access to your equity by refinancing your home. Refinancing your home means you work with a bank or broker to take out a new loan on your home. The existing lender would have to be paid off through the refinance, and you receive a new rate and new program. You will also pay loan fees to the bank or broker to establish the new loan.

How do you gain equity and how does Predatory Lending affect that equity?

Equity is gained two different ways. You gain equity by paying down your loan and through market appreciation. Appreciation happens when the price or value of your home go up. Please see an example of appreciation in Example 2.

Example 2:
You purchase your home in January 2006 for $400,000. After 5 years the value of your home goes up to $600,000. You owe the bank $300,000 so the equity remaining in your home is $300,000.

Equity is also gained through paying principal on the loan. So, if you take out a mortgage that requires you to pay the fully amortized payment, you will pay principal and interest. The principal portion of the payment pays down the loan and the interest is the cost of the loan. As shown in Example 3, the higher your rate the more interest you pay and the longer it takes you to pay down the loan on your home.
Example 3:

Loan Amount: $300,000 ---------- Loan Amount: $300,000
Interest Rate: 7% ----------- Interest Rate: 9%
Total Payment: $1,995.91 -------------- Total Payment: $2,413.87
Total principal paid after 1-year: $3,047.47 ---- Total principal paid after 1-year: $2,049.61Total interest paid after 1- year: $20,903.45----- Total Interest paid after 1-year: 26,916.83
Example 3 shows you that the higher your rate, the longer it can take to pay down your loan and gain equity. You will pay over $6,000 more in interest every year at the higher interest rate loan.

Your first home is the key to your financial security and based on your interest rate, loan program and fees charged for the loan, you can position yourself to maximize on the growth of your equity.

Predatory Lending Facts

9 billion dollars is lost each year to Predatory Lending and minority families, the senior community and single moms are the #1 victims.

In 2005 national banks charged minority families an average of 2-3% more on their home loans than white consumers. On a 300,000 loan 2-3% higher means a payment of $ 500-$700 more each month. That is a loss of over $6,000 in equity each year.

Affluent African Americans have 4 times the chance of being victims of Predatory Lending than low-income white families.
The Hispanic community has 2 times the chance of being victims of Predatory Lending than low-income white families

In 1920 the African American Community owned 15.5 million acres of land. Today they only own 1.1. million acres of land.
"U.S. borrowers lose $9.1 Billion Annually
To Predatory Lending Practices"

Types of Predatory Lending

Flipping or Churning

Flipping or churning occurs when a lender or broker continually refinances a consumer’s home loan without providing a benefit to the consumer for the new loan. Each time the loan is done, more and more fees are folded into the loan which strips equity from the consumer’s property. Seniors are the number one victims of this type of predatory lending practice. If you are refinancing your home, you need to know your benefit.

Exorbitant Fees

When you refinance or buy a home there are fees associated with the transaction. These fees should be disclosed to you on a good faith estimate. The fees cover items including but not limited to title insurance, escrow, taxes, insurance, processing and loan origination fees.

A fair broker will charge a loan origination fee and a loan processing fee along with third party fees such as escrow and title. Unfair brokers and lenders charge application fees, administration fees, and excess fees that are folded into a consumer’s loan.

Brokers and lenders should get paid for their services however some abuse fees. These fees are deceptively costless to many borrowers because when the borrower “pays” them from the equity of their home, they do not feel the pain of counting out thousands of dollars in cash. The borrower parts with the money later, when the loan is paid off and the equity value of their home is reduced by the amount of fees paid to get into the loan.

Financed Credit Insurance

Loan product paid for by the borrower that repays the lender should the borrower die or become disabled. However, the total premiums for the life of the insurance policy are added to the amount of the loan.

Generally, in the single-premium credit insurance (also known as SPCI), five years worth of premiums are added directly to the loan amount. The borrower then pays interest on this amount for the life of the loan and typically has not even begun reducing the loan’s principal balance by the time the five-year credit life insurance coverage period expires. Consequently, when a borrower moves or refinances out of a Sub prime loan after five years, all of the premiums for the terminated insurance are stripped directly out of the borrower’s home equity.

If you choose to purchase this type of insurance policy get it on your own from an insurance company.

Undisclosed Prepayment Penalties

Hidden or deferred fees can strip significant equity from borrowers. Prepayment penalties are usually equal to six months of interest if the consumer refinances or sells the home before the prepayment penalty expires. If a loan carries a prepayment penalty, the consumer should be informed of the prepayment penalty before signing their loan documents. In addition, the prepayment penalty should not be longer than the rate is fixed for.

Some loans have prepayment penalties because lenders want to ensure that they make a certain amount of interest on a loan before the consumer gets out. Prepayment penalties come standard on sub prime loans or higher risk loans (FICO scores below 620). In certain situations, a program with prepay is okay if the consumer is using the loan as a bridge loan to help them fix their credit. The lenders that have standard prepayment penalties also have options to remove the prepayment penalty by taking a higher rate and/or by paying fees.

So on a $300,000 home loan that is financed at a 7% interest rate, your prepayment penalty to get out of the loan early would be approximately $10,500. If you had the same loan amount and an interest rate of 9%, your prepayment penalty would be approximately $13,500.

Prepayment penalties are usually equal to six months worth of interest if the borrower prepays at any time, for any reason, during the first three to five years of the loan. For a 10% interest rate loan, the penalty would be 5% of the loan balance. On a $150,000 loan, this fee is $7,500, more than the total net wealth built up over a lifetime for the median African American family. It’s estimated that these Sub prime prepayment penalties cost 850,000 families $2.3 billion each year.

Rate Discrepancy

Over 50% of families are paying a higher interest rate on their mortgage than they qualify for. The reason is broker and lenders make more money when they charge higher rates.

The higher your rate the more interest you pay the longer it takes for you to pay down your loan.

It is reported that over 63% of minorities who are eligible for conventional loans are placed in Sub-prime programs. Sub prime loans carry higher rates and fees, and many sub prime loans (35 to 50% according to Fannie Mae and Freddie Mac) are being made to borrowers who could have qualified for prime loans.

How to Protect Yourself from Predatory Lending?

1. Understand your credit position and position it before you buy a home

2. Put a budget together before refinancing or purchasing a home so you do not over extend yourself.

3. Ask the broker about your loan program if it is an adjustable ask them what your Margin is, Your Index and The Cap on your loan.

4. Ask for a Good Faith Estimate – this will outline your loan amount, your loan program, the costs of your loan, and your monthly payment.

5. Do not sign any blank paperwork

6. Check to see if your loan officer is licensed with the correct agency

7. Attend seminars and workshops to empower your self

The best way to protect yourself is to contact FCLS today or Apply directly online 24 hours a day. We are here to help you protect your investment.

Credit… A Key To Wealth Building

Credit is the key to wealth building. Before you embark on any financial transaction you must understand your credit. Do you have good credit, ok credit, at risk credit?

A credit report is a snapshot of one’s payment history. It is used by lenders, insurance companies, landlords, and employers to determine a consumer’s willingness to pay and demonstrate their credit worthiness. One’s credit report and their FICO score (ranging from 300-850) will help financial institutions decide if one is eligible for a loan and if so what type of interest rate they can obtain. As consumers, we must use our credit reports to prove to others that we are a good risk when they consider us as a potential borrower, employees, tenants, etc.

Your credit score determines the interest rates you receive on home loans, car loans and credit cards. The better your credit score is the better the interest rate.

When you pay a lower interest rate (also considered the cost of taking the loan out) you save thousands of dollars in wasted interest and you build your equity much faster when you buy a home or any real estate investment.

FCLS understands that along the way good people face credit challenges. It is important to know that you deserve respect and fair lending practices regardless of your credit history. Yes you will pay higher interest rates on your loans; however you do not have to be gouged.

You can rebuild your credit regardless of your past history. The Fair Isaac Company, the company who created the system that tabulates your score, weighs the negatives and the positives through their software scoring system. Scores change daily based on activity and length of time since negative activity. If you work on adding new credit and rebuild your payment history your score will increase over time.

Consumers often surrender their credit and if you surrender your credit you will never build a solid financial future for your family.

Every year consumers are entitled to receive a free credit report from www.annualcreditreport.com.


ORDER YOUR CREDIT TODAY AND GET EMPOWERED!


FACTORS THAT AFFECT CREDIT SCORE

Payment History- 35%

It is recorded on your credit report each time you are 30/60/90 days on any of your credit obligations.

The more recent the late payment, the more of an impact it has on your credit score. Even if you are late on a $5 payment your score will be affected. If you do end up being late, catch up.

Amounts Owed- 30%

Consumers never want to appear as if they are overextended.
Aim to have a balance of less than 50% of the limit on all of your revolving accounts. Concentrate on paying down the balances each month. If you only pay the minimum payment required each month, a $3,000 credit card debt can take up to 20 years to pay off.

Length of Credit History- 15%

The longer an account is opened and in good standing with a particular creditor, the better. Avoid transferring balances too often because this will eliminate these relationships. It is important to establish a good history with our creditors.

New Credit- 10%

When applying or refinancing, keep all applications within 30 days of each other.
When you request a credit report yourself it will not affect your credit score.
Credit can be reestablished by opening new accounts and paying them on time.

Types of Credit Used- 10%

Diversify by having revolving accounts, installment accounts, merchant accounts.
Limit applications for new accounts, having 3-5 credit cards is sufficient.


TIPS TO IMPROVE YOUR CREDIT SCORE


Pay down your debts to below 50% of the credit limit. – If you have a $ 1,000 dollar credit limit on a credit card try to keep the balance below $500.

Make Payments on Time even after late pays.- A $10 late payment reported to the credit agencies, can pull your credit score down as drastically as a $200 payment. If you have been late get caught up. The further away from the late payments you are, the higher your score will get. Your score can be 550 today, because of a recent car late and increase within months if you get caught up and pay on time.

Check credit reports periodically and correct all inaccurate information. -Mistakes happen from late pays to credit fraud. Keeping up with your credit report allows you to catch the mistakes early enough to correct them. Consumers are entitled to receive a free credit report once a year from all credit agencies log on to www.annualcreditreport.com.

Pay off all past due and collection accounts- These accounts can come back to haunt you and bring down your score. After 7 years, you can write to Experian, Equifax or Transunion to have the collections removed. However if the debt is sold to another company before the 7 years is up even if it is 6 years and 11 months later, the collection company can add it on to your credit and the 7 year clock will start over again.

This means you could have a 700 credit score which is considered A credit and drop drastically depending on the debt that is added. Collections can also be placed as a lien on your property. This means if you decide to sell or refinance your home you will not be able to unless you pay off the collection and all accumulated interest.

Go back and negotiate your collections 25 cents on the dollar or 50 cents on the dollar with the debt collector. Also ask them for a letter of deletion before you make the payment. If you delete the collection it will be better than just showing it paid in full. Deleting collections or late pays will increase your score paying off collections will not but it will allow the clock to stop so your credit score can bounce back.

Open up a secured credits- When your credit score drops banks will not extend credit on credit cards without security deposits. Go to your local bank and apply for a secured card. The secured card allows the bank to extend a line of credit to you secured by a set amount you deposit in the bank. You can use the card and make payments as you would a regular card. You can only use up to the amount deposited. The card will start to raise your score as you use it and make monthly payments. If the card does not show up on your credit, simply write into the credit bureaus, Experian, Equifax, and Transunion and give them the card number, the name of the bank you have the card with, your address, your social security number, your name and they have 30 days to add the credit card onto your credit after they verify it with the creditor.

Retain older accounts proving good history and avoid opening unnecessary accounts- Closing accounts can hurt you keep your accounts open.

Prevent unsolicited promotional inquiries- You can opt out at www.optoutprescreen.com

Foreclosure

How to Avoid Foreclosure

The guidance below is applicable to homeowners with FHA Insured loans. While a good deal of this information may apply to all homeowners in danger of losing their homes, not all of the foreclosure avoidance tools mentioned may be available to you if you have a VA or conventional loan. Additionally, HUD/FHA does not have any Loss Mitigation oversight over VA or conventional loans. Please contact your lender or a housing counseling agency.

Q: What Happens When I Miss My Mortgage Payments?

Foreclosure may occur. This is the legal means that your lender can use to repossess (take over) your home. When this happens, you must move out of your house. If your property is worth less than the total amount you owe on your mortgage loan, a deficiency judgment could be pursued. If that happens, you not only lose your home, you also would owe HUD an additional amount.
Both foreclosures and deficiency judgments could seriously affect your ability to qualify for credit in the future. So you should avoid foreclosure if possible.

Q: What Should I Do?

1. DO NOT IGNORE THE LETTERS FROM YOUR LENDER. If you are having problems making your payments, call or write to your lender's Loss Mitigation Department without delay. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses. Without this information, they may not be able to help.
2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
3. Contact a HUD-approved housing counseling agency. Call (800) 569-4287 or TDD (800) 877-8339 for the housing counseling agency nearest you. These agencies are valuable resources. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. The housing counseling agency may also offer credit counseling. These services are usually free of charge.

Q: What Are My Alternatives?

You may be considered for the following:
Special Forbearance. Your lender may be able to arrange a repayment plan based on your financial situation and may even provide for a temporary reduction or suspension of your payments. You may qualify for this if you have recently experienced a reduction in income or an increase in living expenses. You must furnish information to your lender to show that you would be able to meet the requirements of the new payment plan.
Mortgage Modification. You may be able to refinance the debt and/or extend the term of your mortgage loan. This may help you catch up by reducing the monthly payments to a more affordable level. You may qualify if you have recovered from a financial problem and can afford the new payment amount.
Partial Claim. Your lender may be able to work with you to obtain a one-time payment from the FHA-Insurance fund to bring your mortgage current.
You may qualify if:
1. your loan is at least 4 months delinquent but no more than 12 months delinquent;
2. you are able to begin making full mortgage payments.
When your lender files a Partial Claim, the U.S. Department of Housing and Urban Development will pay your lender the amount necessary to bring your mortgage current. You must execute a Promissory Note, and a Lien will be placed on your property until the Promissory Note is paid in full.
The Promissory Note is interest-free and is due when you pay off the first mortgage or when you sell the property.
Pre-foreclosure sale. This will allow you to avoid foreclosure by selling your property for an amount less than the amount necessary to pay off your mortgage loan.
You may qualify if:
1. the loan is at least 2 months delinquent;
2. you are able to sell your house within 3 to 5 months; and
3. a new appraisal (that your lender will obtain) shows that the value of your home meets HUD program guidelines.
Deed-in-lieu of foreclosure. As a last resort, you may be able to voluntarily "give back" your property to the lender. This won't save your house, but it is not as damaging to your credit rating as a foreclosure.
You may qualify if:
1. you are in default and don't qualify for any of the other options;
2. your attempts at selling the house before foreclosure were unsuccessful; and
3. you don't have another FHA mortgage in default.

Q: How Do I Know if I Qualify for Any of These Alternatives?

Your lender will determine if you qualify for any of the alternatives. A housing counseling agency can also help you determine which, if any, of these options may meet your needs and also assist you in interacting with your lender. Call (800) 569-4287 or TDD (800) 877-8339.

Q: Should I Be Aware of Anything Else?

Yes. Beware of scams! Solutions that sound too simple or too good to be true usually are. If you're selling your home without professional guidance, beware of buyers who try to rush you through the process. Unfortunately, there are people who may try to take advantage of your financial difficulty. Be especially alert to the following:
Equity skimming. In this type of scam, a "buyer" approaches you, offering to get you out of financial trouble by promising to pay off your mortgage or give you a sum of money when the property is sold. The "buyer" may suggest that you move out quickly and deed the property to him or her. The "buyer" then collects rent for a time, does not make any mortgage payments, and allows the lender to foreclose. Remember, signing over your deed to someone else does not necessarily relieve you of your obligation on your loan.
Phony counseling agencies. Some groups calling themselves "counseling agencies" may approach you and offer to perform certain services for a fee. These could well be services you could do for yourself for free, such as negotiating a new payment plan with your lender, or pursuing a pre-foreclosure sale. If you have any doubt about paying for such services, call a HUD-approved housing counseling agency at (800) 569-4287 or TDD (800) 877-8339. Do this before you pay anyone or sign anything.

Q: Are There Any Precautions I Can Take?

Here are several precautions that should help you avoid being "taken" by a scam artist:
1. Don't sign any papers you don't fully understand.
2. Make sure you get all "promises" in writing.
3. Beware of any contract of sale of loan assumption where you are not formally released from liability for your mortgage debt.
4. Check with a lawyer or your mortgage company before entering into any deal involving your home.
5. If you're selling the house yourself to avoid foreclosure, check to see if there are any complaints against the prospective buyer. You can contact your state's Attorney General, the State Real Estate Commission, or the local District Attorney's Consumer Fraud Unit for this type of information.

Q: What Are the Main Points I Should Remember?

1. Don't lose your home and damage your credit history.
2. Call or write your mortgage lender immediately and be honest about your financial situation.
3. Stay in your home to make sure you qualify for assistance.
4. Arrange an appointment with a HUD-approved housing counselor to explore your options at (800) 569-4287 or TDD (800) 877-8339.
5. Cooperate with the counselor or lender trying to help you.
6. Explore every alternative to keep your home.
7. Beware of scams.
8. Do not sign anything you don't understand. And remember that signing over the deed to someone else does not necessarily relieve you of your loan obligation.

Act now. Delaying can't help. If you do nothing, YOU WILL LOSE YOUR HOME and your good credit rating.

Why the Countrywide deal makes sense

Whether Wall Street likes it or not, Bank of America's Ken Lewis is getting a good deal, according to Shawn Tully's number-crunching.

By Shawn Tully, editor at large


(Fortune) -- Bank of America's $4 billion deal to rescue Countrywide Financial is getting decidedly mixed reviews from Wall Street. Investors fret that CEO Ken Lewis is overpaying for a ruined franchise to save face, following his ill-timed $2 billion investment in Countrywide late last year.

The markets are hardly cheering: B of A's stock has dropped as much as 2% today to $38.40, its price in early 2002. But the best guide to gauging the probable success or failure of this deal is studying the numbers: they show that, barring absolutely disastrous writedowns, this deal will prove a winner.

Before we get to the all-important math, let's examine two other important reasons to endorse this deal. The first is Ken Lewis' consistently underrated record as an acquirer. Investors accused Lewis of overpaying for Fleet BankBoston in 2004, but Lewis recognized what the market didn't: That Fleet¹s earnings were poised for a sharp rebound following years of huge credit losses. B of A also generated far bigger cost savings than Wall Street, or even the bank itself, anticipated by shuttering inefficient branches and combining computer systems.

Skeptics are leveling the same charges against Lewis in his $21 billion purchase of La Salle, a deal that gives B of A a huge footprint in a market where it was heretofore weak, the Chicago region. But once again, it's probable that higher-than-anticipated cost savings will save the day. It's more likely that Lewis is following his usual course of weighing the numbers rather than making an irrational, emotionally charged decision.

A second reason the deal makes sense is the branding issue. To be sure, Countrywide (CFC, Fortune 500) established a powerful brand name in the mortgage boom. But its image is now severely tarnished. The lender is now a poster child for all the excesses of the real estate bubble. Sure, it's possible that the Countrywide name could be revitalized. But why take that chance? The best way to extract value from buying Countrywide is to keep its powerful origination and servicing franchises, and re-brand its product to erase the unsavory associations that the Countrywide name now raises with America's borrowers.

Of all the big banks, B of A is in the best position to do that - for a simple reason. It boasts the strongest brand in banking. Its Hispanic customer base, the biggest source of its growth, has great confidence in the Bank of America brand, and B of A has shrewdly targeted its offerings to that market. It's inevitable that B of A will rebrand Countrywide as Bank of America (BAC, Fortune 500). As a result, what's now a fallen name will quickly take on new luster.

Now, let's examine the make-or-break numbers. B of A is paying around $4 billion for a franchise that was worth over $20 billion just a year ago. Sounds like it's paying a cheap price. But is the price really cheap? The best way to find out is to use the discounted cash flow technique you learn in Econ 101, and that still proves a valuable guide to estimating the future returns on investments.

To play it safe, let's make some highly negative assumptions. Say that Countrywide takes a $3 billion writedown for 2008, or $2 billion after-tax, and makes no money at all in 2009. Starting in 2010, it returns not to its peak earnings, but to the profits it was generating in the 2003 and 2004 period, around $2 billion a year. Also, let's say that Countrywide's profits remain flat from then on, simply increasing with inflation.

Given those assumptions, what's the present value of Countrywide's estimated earnings if B of A is to achieve a 10% return, and how does it compare with what Lewis is paying? By my calculations, Countrywide's earnings stream is worth around $13 billion. B of A is paying $4 billion. Sure looks like a winner.

But let's say the writedowns are far bigger than anticipated, and that Countrywide faces heftier payoffs on class action suits than Lewis is predicting. Fair enough, but Lewis enjoys just what Warren Buffett calls the most important thing in investing, a big margin for error. Put simply, Countrwide could suffer another $9 billion in after-tax losses, and B of A would still make a 10% return.

B of A could get an additional margin for error by trumping the highly negative assumptions. When you invest at a low price, the bar is set far lower for future performance, so any improvement makes the stock worth far more. For example, it's highly unlikely that Countrywide's earnings won't grow at all once it recovers. Lewis could also gain big economies of scale that could actually boost Countrywide¹s profits above the $2 billion mark, by cutting overhead and combining Countrywide outlets with B of A's network of over 6000 branches.

The mortgage industry is still a lot like the banking industry was when Lewis was vacuuming up regional banks under Hugh McColl at NationsBank. That fragmentation led to inflated costs, just as it did in banking before the massive consolidation of the last decade and a half. Sure, this deal could still fail. But the numbers sure look good.