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Home Owners Going Under as Predatory Mortgages Show Ugly Side

"Too good to be true" rates masked future problems; foreclosures at all time high

Oct. 4, 2007

Story Contact:  Jennifer Faddis, (573) 882-6217, FaddisJ@missouri.edu

NOTE:Accompanying video sound bites and b-roll are available for viewing or download at http://umsystem.edu/video or on tape by contacting Kent Faddis, FaddisK@missouri.edu

COLUMBIA, Mo. – Many mortgages issued during the housing boom are now going into default leaving homeowners in sticky situations and foreclosures at an all time high. Nationally, foreclosures are up 115 percent compared to this time last year, according to RealtyTrac – a company that tracks foreclosure filings. Many of these people are shouldering the burden of a subprime loan and it is estimated that half of those borrowers could have qualified for a traditional and less risky prime loan, according to a University of Missouri-Columbia financial expert

“Home ownership is the American dream,” said Brenda Procter, MU Extension state specialist and personal financial planning instructor in the College of Human Environmental Sciences. “Many people are excited about owning a home and don’t do their homework, don’t ask enough questions and don’t realize they have certain rights in the process. That is why people often get stuck with subprime loans that may sound good on the surface because of low teaser rates, but have consequences down the road. In some cases, the rates could adjust and a monthly payment could double in two years.”

Subprime mortgages are for borrowers with less than perfect credit. Predatory subprime mortgages have extremely high interest rates which are often adjustable, contain excessive or unnecessary fees, and often include extra products that are not needed such as additional insurance. Many of the contracts contain clauses that keep borrowers from suing the company even if their contract contains unfair conditions. Nearly 80 percent of all subprime mortgages have a large penalty for paying it off early, making refinancing difficult. If financial obligations are not met, borrowers will face foreclosure or be forced to refinance – which will bring about more costs and fees.

“When foreclosure is upon you, do not stick your head in the sand,” Procter said. “If you are struggling to make payments, contact the mortgage company before they contact you. They do not have to give very much notice to foreclose. In some cases, if you make first contact the company may work with you or you can contact a credit counselor who can help you work out an arrangement.”

It is important to ask a lot of questions up front, according to Procter, and always know what you will pay over the life of the loan. Red flags that a mortgage is predatory include:

  •          The focus is only on monthly payments (which could start low and balloon)
  •          The loan offer was unsolicited
  •          There is difficulty determining fees and other costs before closing
  •          There is pressure on closing day not to back out of the loan
  •           Questions are redirected to short-term answers and long-term talk is avoided

Those age 65 and older are five times as likely to have a subprime mortgage as those 35 or younger. Procter said many elderly people are targeted with refinancing offers they do not need. In some cases they already own their home, but receive unsolicited phone calls offering loans with the promise of being able to take cash back out of the home. Initially, the offer may sound great, but because of fees, costs and rates that may increase over time, payments may be difficult or impossible to make.

“In some cases, the elderly can actually lose their home because of this practice,” Procter said. “When someone is enticed to take out a loan that is not in their best interest or adds no value to their financial situation, I would call that predatory.”