Predatory lending is an insidious practice. Those that make a short term profit at the expense of another person’s financial health are criminals. Of course, they know little of the damage they cause, but those of us who try and pick up the pieces know that harm all too well.
I was called to meet with an elderly couple in White Plains, and a family friend was also present. I thought little of it in the beginning, but as I came to learn of their circumstances, I understood that the friend was there to ensure that they wouldn’t get hurt again. About a year earlier, a mortgage person convinced them to refinance their home with an option-ARM, which is a very exotic product intended as a short term loan for investors. I am sure the loan officer made a healthy commission, but these people belonged in this loan as much as Stevie Wonder belonged behind the wheel of a Ferrari.
The way it works is that the interest rate is artificially low in the beginning period, and then the difference between the note rate and the market rate is added to the loan principle each month. If the ARM (adjustable rate mortgage) rate is 2% and the market rate is 7%, that month’s 5% annual interest is the amount that the loan amount increases. The low payment literally cannibalizes equity. Investors like them because the teaser rate is low, and by the time the adjustable rate period is at hand the home is resold. Not so for a long term owner occupant. By the time I had gotten there, they had realized that tens of thousands of their equity had disappeared. Nobody explained this to them, or, if it was covered, it was sped through so quickly they didn’t know what hit them. To make matters worse, the loan had a prepayment penalty, which is incredibly rare in the state of New York.
The clients were understandably mistrustful of anyone who promised to help them, and it was only their friend’s presence that convinced them to work with me. For the entire period of the listing (it took almost 7 months from listing to closing) we never met alone once. There was always a friend or relative present. I didn’t blame them, and I actually preferred it that way, because every new person that met me became an ally.
It was a tough sell: we had subordinate financing, a prepayment penalty, a very outdated house, and the sale price of comps was still high at that point because the market decline was in it’s infancy. Even if we brought an offer, there might be appraisal issues. They also had a large amount of personal belongings to move, a difficult task for elderly, infirmed people.
We did get an offer, and the work began on negotiating the short payoff. One piece of good luck came through when a local non-profit that the clients contacted on their own got the pre-payment penalty disallowed (another example of people doing something to help themselves rather than curl into a fetal position). In our process we have the buyers sign a conditional contract, contingent on bank approval of the short sale. These things can go on for months, and there is always a danger of the lender giving the buyer an “out” by countering at a higher price. After weeks and months of frustration and waiting, the buyers did become nervous. I spoke with their agent quite often, and much of the discussion was reassuring them that we were confident we would get the deal done.
The approval did come through, and with a rare caveat: an unsecured note of $30,000 would have to be paid back by my clients. The lender would allow them to sell and release the lien, but the bank wanted another $30,000. The term was advantageously long and the rate low, so the monthly payment would be a fraction of a $30,000 car for example, but it was a post closing obligation. This is exceedingly rare; we had little choice. It was either that or foreclose. The clients accepted the lender’s terms.
They are renting now, and their expenses are far more in line with their fixed income. The stress is alleviated, and in spite of the small compromise they had to make with the lender to make the deal work, their quality of life is far better. In a perfect world, I would hunt down the loan officer that put them in that option-ARM and make him pay back the $30,000.