Spotting Predatory Lenders

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WITH PETER G. MILLER

My Townhouse Association Is Banning Rentals, So What Do I Do with My Properties?

Spot Predatory Lenders Before They Strike BY CHARLES SCUTT CTW Features

In the jungle, there are two kinds of animals: those that hunt, and those that are hunted.The same axiom can apply to the wild world of mortgage shopping.There are borrowers who hunt for the right mortgage loan,

and those that are hunted by one of the most cunning and elusive of all modern savage beasts – the predatory lender. A predatory lender is typically defined as someone who pushes their services on people, especially those in need of money for medical bills, debt consolidation, tax payments or home repairs,

says Jennifer Wright, branch manager for Real Living, Inc., Columbus, Ohio. Gibran Nicholas, chairman and founder of the CMPS Institute, a national training and certifying organization for mortgage professionals in Ann Arbor, Mich., prefers to broaden that definition.

“A predatory lender is one that recommends a mortgage product that is not ‘suitable’ to a particular client circumstance or that would not put a client in a better financial situation than before the loan was issued,” he says. “The victims targeted usually

See Lenders Page 2 Photo courtesy of James Hardie Building Products, Inc

Q: Six years ago I bought a townhouse to use as a rental property. It was a successful venture that was allowed under the homeowners association covenants, so I purchased a second unit that came on the market a year and a half ago. Now the homeowners association has banned rentals starting in 2010. In effect, I will be forced to sell my properties. There are more than 50 units in this complex and I’m the only absentee owner. Can they do this to me?

A: Essentially you have a four-year grace period to change minds. Is it possible for the association to amend the rule so that units now rented can be “grandfathered” in under the old standard? This is a reasonable accommodation that might be a lot cheaper than litigating the matter. While courts have often supported tenant associations in such disputes, there is no way to guarantee such a result – something the association may want to consider. From your perspective, the best approach is to ask nicely, threaten nothing and see if reason can take its course. Speak with a real estate attorney for specific options in your jurisdiction. Q: I’m selling my home for $309,900 and have received a $299,900 offer. The buyer wants to use a capital improvement credit to borrow money to get the house plus get closing and down payment funds. They have put in $1,000 in earnest money. The lender says the “price” of the house needs to be changed to reflect a selling price of $323,000 so they can get an appraisal for that amount. I feel I’m subsidizing $10,000 of the purchase price and wondering if they can possibly be serious. They want me to sign by tomorrow. A: An appraisal is an independent estimate of value. Lenders will make loans on the appraised value or the sale price – whichever is less. There are situations where lenders allow “seller contributions” to offset buyer costs. Such credits must plainly be reflected in the sale agreement. Some programs allow a seller contribution equal to 3 percent of the selling price, 6 percent or even 9 percent. For instance, with a $299,900 sale a 6 percent seller contribution would mean the buyer gets a $17,994 credit at closing -- and you would get $17,994 less. See ASK OUR BROKER, Page 2

Fly-by-night contractors can roll through town as quickly as storms do. Researching past jobs and checking for proper insurance documents and licenses can keep your project from becoming a horror story.

Project Disaster

Don’t Trust Any Old Contractor BY SHEREE R. CURRY CTW Features

T

urbulent weather from hurricanes to blizzards takes its toll on the disposition of Americans, as well as their homes – literally.As a result, home improvement projects, particularly siding jobs, are spurring remodeling activity. Professional remodelers answering a National Association

of Home Builders survey released in 2005 said 27 percent of their business was re-siding jobs, up from 19 percent the previous year. Due in part to severe inclement weather, siding replacement projects amounted to just more than 10 percent of the $210 billion that Americans spent on home remodeling projects in 2005. Given that these torrential storms huff and puff and blow

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bits of home siding away, choosing a contractor to fix the damage is like a complex fairy tale with an antagonist that must be conquered. Even the NAHB warns on its Web site:“Beware of fly-by-night contractors.” Frequently, after hail, wind or another act of God thrashes through town, a multitude of storm-chasing contractors await in the clearing. Homeowners, with insurance checks in hand,

are knee-high in debris, wading through a slew of free estimates that vary more wildly than the product samples protruding from the suitcase of each siding contractor that knocks on their door.Weeding out the reputable contractors from others seems like an impossible task. “Unfortunately, there are unscrupulous contractors out there, but that is not representa-

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LENDERS CONTINUED FROM PAGE 1 include those who are most vulnerable and have financial troubles, such as the poor and elderly,” says Wright.“These lenders understand their financial hardships and will offer help, when in reality he or she will include higher interest rates, loans with huge pre-payment penalties and exorbitant closing costs.” Why are predatory lenders popping up more lately? Wright says that the low interest rate environment of the last few years, coupled with the tremendous growth in home values (and home equity) has contributed to the record growth of the mortgage industry, for good and bad. “The ease with which lending information is shared and obtained on the Web is another major factor for the increase in predatory lending,”Wright says. What’s more, there are no uniform standards, testing or certification for mortgage loan officers to follow, she says. Most states don’t have the funds or manpower to enforce existing regulations that they have on the books, let alone come up with new, enforceable regulations. “This ‘wild west’ environment has created tremendous opportunities for unscrupulous people to come into the mortgage industry and make a ‘quick buck’ at the expense of unknowing consumers,”Wright says.

You can usually spot a predatory lender by the “too-good-tobe-true” offers they make, say experts. “Be cautious if anyone advertises or says ‘poor credit? No problem,’ calls on the phone or comes to your door offering you a ‘bargain loan’ that he or she rushes you to sign that day,” says Sally Hurme, issue coordinator for the consumer protection department of AARP,Washington, D.C. Likewise, be suspicious if they ask you to pay a fee up front to cover a first payment or other expenses, or offer you a loan with a small monthly payment and a balloon payment that will be difficult to pay when it comes due. For Charles Alexander, president of Alexa Corp., Raleigh, N.C., the biggest red flag is a lender or loan officer that won’t provide a good faith estimate, a truth in lending statement or a complete explanation for an annual percentage rate that is the same as the interest rate. Other signs that you may be dealing with a predatory lender, says Nicholas, include: • A lender who gives you a pre-approval letter without pulling your credit report and looking at your income and asset statements. • A lender that encourages you to refinance without any significant benefit to you, such as a lower interest rate, a new fixed vs. a current adjustable rate mortgage or a cash-out for a legitimate purpose.

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• A lender that advertises significantly below market interest rates. • A prepayment penalty that is six months worth of interest instead of 1 to 2 percent of the loan amount. The best way to avoid being scammed is to always ask for a referral from a realtor, previous lender, family member, friend, the Better Business Bureau or the Mortgage Bankers Association, says Wright. Rather than shopping for the elusive ‘lowest rate,’ borrowers should shop for a trustworthy lender with a competitive rate who can help them make smart financial choices, says Nicholas. “Look for a lender with some find of certification, and interview prospective lenders with questions like,‘what are mortgage interest rates based on, and how will your mortgage strategy help me to retire more efficiently, provide for my children’s education or help me to achieve financial freedom?’” Additionally, Nicholas and Wright also recommend reporting suspicious lending practices to the Federal Trade Commission, your State Attorney General’s office and your state licensing agency.

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Alternatively, there are loan programs that provide both for the purchase of the property and reserves for repairs and updates.Think of the Department of Housing and Urban Development’s 203(k) rehab Program. Money above the purchase price is released to buyers as improvements are made. By raising the selling price the buyers are suggesting that you would net roughly $300,000 after credits to them.They expect the loan to be made on the basis of a $323,000 sale price. But is the property really worth $323,000? If an independent appraiser suggests that value then such a price is reasonable. However, there are two cautions here: First, if the property is appraised for $323,000 then why sell for $299,900? Maybe there are buyers who would pay the higher price or close to it, giving you more cash at closing. Second, if the property is not appraised for $323,000 can the buyers close the sale? By any chance, is the offer written on a form supplied by the purchaser? Why not demand a larger deposit so that if the deal fails you will get more compensation? Please see a real estate attorney or legal clinic before signing anything. If I were required or encouraged to sign a complex agreement by tomorrow, before a review of all terms, I would have to say no. But that’s just me.

Q: What’s the best way to improve your credit?

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A: There are no shortcuts.The best approach – and this may seem dull – is to pay all bills on time and in full. The real trick is to live below your means.Whatever you earn, other people earn less so there are always opportunities to cut costs. If you must get a less expensive car or eat out less often, that’s a fair price to pay for better credit that can save you thousands of dollars a year in excess interest costs. If you start a budget today, within a year you should see a substantial improvement in your credit standing. Remember that creditors are most interested in your bill paying for the last year or two, so a lot of past credit sins can be overcome in a short time with good budgeting.

Photo courtesy of James Hardie Building Products, Inc

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CONTRACTORS CONTINUED FROM PAGE 1 tive of our members and the way they do business,” says Jerry Howard, executive vice president and CEO of the National Association of Home Builders. This can be a high-profit margin business, and workers will float into town from far away states to take advantage of the jobs to be had in storm-damaged regions. But you’re not protected from scams or shoddy workmanship just because you opted to hire a local contractor. In affected areas, such as the northwest Minneapolis suburbs, which were rocked with a major hail storm in September, even local siding experts are using out-oftown subcontractors to help keep up with the work demand. Lodging facilities off the highways are filled with siders and roofers who have migrated north for the opportunity. At the same time, contractors in some cities are hard to find because many moved south for the winter to help homeowners in Louisiana, Mississippi and Florida size up their damage. Out-of-town subcontractors do not equate to an inferior workmanship, as there are some who truly are aces in their craft. The NAHB is a good place to turn for recommendations, as its members often stay up to date with the industry through trade shows and seminars. “Your local home builders associations and the NAHB have resources to help you make smart decisions about hiring a contractor and getting your repairs underway, whether they result from a natural disaster or from a need for routine home improvement,” Howard says. Some of the questions you should ask a contractor recommended from licenses, insurance and referrals are spelled out in a free NAHB brochure,“How to Find a Professional Remodeler,” released in early February. For starters, look for a contractor with an established business history in your community. Some companies start up the day after the storm hits and fold by

Fishing for a reliable contractor isn’t always an easy task.

time the next one arrives.That lifetime labor warranty doesn’t sound so good if the company isn’t around to fulfill it. And as far as their clean bill of health from the Better Business Bureau is concerned, don’t just check out their record, doublecheck how long they have been members. Some join just in the weeks after the most recent storm and haven’t had time for customers to lodge feedback, others simply change their names every couple of years in an attempt to wipe their unfavorable slate clean. Find out if the company has employees or hires independent subcontractors.And does the insurance they carry protect you from claims arising from jobsite injuries or property damage. Make sure you receive a copy of the remodeler’s insurance certificates so you can determine this yourself. And note, just because a company is insured and bonded, that doesn’t mean the subcontractors are. Everyone needs to be insured, otherwise if something unfortunate occurred, like a worker falling off your roof, you could be liable for footing the bill for the personal injuries. Have contractors supply you with a list of references of like projects, including names, telephone numbers and addresses of clients. Just because they said they re-sided that gorgeous

house on Main Street doesn’t mean they really did. Or even if they did, a drive by won’t tell you if they completed the work on time or had other complications. Call those references or knock on their door and ask meaningful questions, such as “Did they show up on time every day?” Seek out professional references from suppliers or subcontractors to verify if the company has established a sound credit history.A contractor that doesn’t pay its bills on time just may not do right by you, according to the NAHB. And finally, use your instinct. Do you feel comfortable and trust the person based on your encounters so far from how quickly they return calls to prompt arrival times for meetings or overall sales presentation?

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Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to [email protected].