Many people believe that homeowners have to take responsibility for their own financial health and well-being. Although that is true to a certain extent, lenders should also act responsibly.
Unfortunately, greed drives many lenders to encourage homeowners to borrow much more than they can afford to pay and to take out risky, high-cost loans — loans with high fees, hidden fees, and high interest rates.
As more and more mortgage companies develop and roll out new qualification programs, more and more people who perhaps only months ago were unqualified for mortgage loans suddenly become qualified. A renter, who for years has been saving his money for a down payment in order to qualify for a mortgage, sud- denly no longer needs that down payment, or at least not a 20 percent down payment. The renter hears of a program that’s advertised whereby he can qualify for a mortgage. He con- tacts the mortgage company and applies. The mortgage company informs him that he not only qualifies, but qualifies under a new program that allows him to purchase much more house than he ever thought possible. The lender plays up the positives of the program and explains that he qualifies for a sub-prime interest rate, but the rate may adjust up every six months if
interest rates go up. If he’s lucky, interest rates will sink and his payments will decrease.
All the borrower hears is that he qualifies for a
$250,000 loan at 4.75 percent. What he doesn’t hear is that the rate is scheduled to rise by 3 percent a year later, plus any percentage increase in the prime interest rate. In some cases, these loans don’t even have a cap on how high the rate can rise.
Sure, the borrower should have read all the fine print and done the math to figure out for himself exactly how this loan would apply to his partic- ular situation, but he was probably thinking that the lender would never actually approve a loan that was that risky. Unfortunately, this assump- tion is wrong. The loan officer isn’t the one taking the risk. If the loan officer’s money were at stake, the person would never have approved the loan. All the loan officer wants to do is get the loan approved, collect her fee or commis- sion, and move on to the next victim.
If you have a lender who doesn’t take the time to explain the process and all the pros and cons of what you’re getting into, be careful. Work with someone who takes the time to explain the process and the paperwork and assists you in doing the math and comparing the numbers.
The borrower has the right to an explanation from the mortgage broker on what the broker is going to do for the borrower.
The borrower has the right to know how much the broker is getting paid, including how much the borrower is paying and how much the lender is paying for the broker to place the loan.
The borrower has the right to ask questions about terms and fees that he doesn’t understand.
The borrower has the right to a credit decision that isn’t based on race, gender, and so on.
The borrower has the right to know why his loan application was rejected (assuming it is rejected).
The borrower has the right to receive the U.S. Department of Housing and Urban Development (HUD) settlement costs booklet Buying Your Home.
Some other items on the borrower’s bill of rights include the right not to be subject to deceptive marketing tactics, the right to obtain credit counseling, the right to have favorable information reported to credit bureaus, the right not to be subject to bait-and-switch lowball rates, the right to adequate cus- tomer service before and after the closing, and the right not to have any surprises at the closing table.
When you apply for a loan, ask your mortgage broker what to expect. Often, when you apply, you don’t know who your lender is going to be. Your mort- gage broker packages your loan application and may send it off to several lenders for approval. Be proactive in protecting yourself. If you don’t under- stand something, ask questions. If you’re dissatisfied with the answer, ask someone else to explain it to you. Whatever you do, don’t allow yourself to be set up for failure because you didn’t evaluate the whole situation.
According to the Truth In Lending Act, lenders are required by law to fully inform you of the costs and terms of your loan.
Protecting Yourself: Do’s and Don’ts
With all the scams out there and the infinite number of variations on these scams, remaining on the lookout for everything that can possibly go wrong is nearly impossible. However, by following a few standard practices, you can avoid the most common and serious cons.
In the following sections, we explain the do’s and don’ts and try to steer you clear of trouble.
Do take your time
Patience is a virtue, but it can also be a great defense against con artists. One strategy that con artists often employ is to rush you through the decision- making process. They may present you with only one or two options, even though you have a half-dozen options you could consider, and then try to make you believe that you have to make a decision immediately.
Give yourself more time by taking the initiative early in the process. The fore- closure clock is certainly ticking, so you don’t have all the time in the world, but the sooner you begin exploring your options, the more time you have to make better decisions.
Do document everything
Document everything related to your foreclosure, especially any communica- tion you have with your lender (see Chapter 3). Don’t forget to document everything else as well, including conversations you have with people who show up to “help” you. If someone shows up at your house, write down the make and model of his car and even his license plate number, if possible.
Have a list of questions prepared before he arrives and jot down the person’s answers to those questions.
Consider setting a small tape recorder in the center of the table where you hold your meeting. Explain to the person that you would like to record the conversation for future reference. This may not be enough to send all con artists packing, but we would wager that most of them would refuse to be recorded, in which case, you can politely ask them to leave. We have a policy of taping conversations with our foreclosure clients — for their protection as well as ours.
Do read paperwork thoroughly
You’ve participated in at least one closing (when you purchased your current home), so you know the routine — a closing agent passes around a stack of papers, briefly describes each document, and instructs you to sign on the dotted line.
If you’re like most people, you don’t read a single word of those documents.
It’s too much of a hassle, and you trust the person who’s passing the papers around. Besides, if you really did read those documents, the closing would take half the day, and everyone in the room would want to kill you about two hours into it.
Those are poor excuses for not reading and understanding documents before you sign them. If you’re concerned about the time, request the documents a day or two prior to the time you’re required to sign them, and then read the documents and make a list of questions before your meeting. If you’re required to sign several copies of the same documents, compare them side-by-side to make sure that all copies are identical. This protects you in the event that someone slips a deed into one of the copies.
If you’re going to seek legal representation, involve your attorney beforeyou sign any documents. Waiting until after you sign the documents may be too late.
Don’t sign anything you don’t understand
You don’t have to understand all the intricacies of the legalese, but you do need to know what each paragraph or clause means and how it can impact you both legally and financially. Ask yourself the following questions about every paragraph or clause:
What does it mean?
How does this stand to benefit or harm you?
What triggers the clause to take effect?
Say, for example, that you don’t understand what a “joint and several liability for co-signers–successors” clause does. The clause talks about persons who sign the note as being different from those who sign the mortgage, “individual liability,” and “joint and several liability.” You’ve read it, and it still makes absolutely no sense. What do you do? Ask — and keep asking until you get it.
Don’t sign something obligating yourself to its terms without knowing what duties and liabilities you’re responsible for. You don’t need to feel embar- rassed, and certainly don’t let anyone make you feel as though you’re being an imposition. The people asking you to sign the documents may not be rep- resenting you, but they should take the time to explain the documents they require you sign.
Don’t sign over power of attorney without a full understanding
Power of attorney (POA) is a document that gives someone else the right to make decisions or act on your behalf . . . not that there’s anything wrong with that. In some cases, POA is very helpful; for example, when a parent is too ill
to attend to his own legal matters or pay his own bills. In the wrong hands, however, a POA can give the recipient the power to do some real damage.
POAs generally come in two flavors: an unlimited, durable POA, and a limited (or specific) POA. In the following sections, we explain both types.
In almost all cases, we recommend that you not sign over power of attorney to a business or individual who’s assisting you. All that person will be doing is signing paperwork on your behalf, and this is paperwork that you should read and understand yourself before signing. You may want to give POA to a trusted family member if you can’t be somewhere to sign the papers, but you should read the documents yourself beforehand and, if at all possible, sign them yourself.
Unlimited, durable power of attorney
An unlimited, durable power of attorney assigns the grantee unlimited power to make decisions and take action on your behalf. The grantee can execute deeds, mortgages, bills of sale, and so on. The term durablemeans that the grantee holds this power and will continue to hold it even in the event that the grantor becomes incapacitated. This is the broadest grant of power and authority, allowing the grantee to do just about anything. Figure 9-1 shows a sample unlimited, durable power of attorney document.
The opening clause in the POA specifically states that the grantee is supposed to act in a “fiduciary capacity.” This basically means that the person is supposed to treat your money better than she treats her own money.
Conveniently, con artists take this to mean that they can treat themselves to your money.