Property ManagementFreddie Mac To Predatory Lenders: No Thanks
Predatory loans are a problem which bothers everyone -- at
least in theory. In practice, the Home Ownership Equity
Protection Act of 1994 (HOEPA) -- Section 32 of Regulation Z, part of the
Truth in Lending Act -- is supposed to protect the public, but
its scope is limited.
"The rules," says the Federal Trade Commission, "do not cover
loans to purchase or initially construct your home, reverse
mortgages, or home equity lines of credit (similar to
revolving credit accounts)."
In other words, virtually all real estate loans are excluded
from the very legislation on which the public relies for
protection against abusive mortgage lenders.
Now Freddie
Mac has announced a new effort to turn away predatory
loans, a strategy that has the potential to seriously impact
abusive lenders.
Freddie Mac is a "Government Sponsored Enterprise" or GSE, an
entity first created by the federal government but now a
private company. Freddie Mac does not actually make home
loans, instead it buys mortgages from local lenders -- but
only those loans which meet its underwriting standards. If
local lenders want to sell loans and get Freddie Mac"s cash,
such financing must meet certain criteria.
Part of the lending galaxy includes "subprime" loans,
financing with steep interest costs. There is a place for such
mortgages because there are borrowers who have poor credit and
such individuals represent so much default risk that they
should not be entitled to the best possible rates and terms.
Within the scope of "subprime" loans, however, are "predatory"
mortgages, loans with high rates and hideous terms --
loans HOEPA largely ignores.
Freddie Mac has announced that it will no longer purchase
subprime loans that include a variety of onerous features
commonly associated with predatory financing.
Prepayment Penalties
After October 1st, Freddie Mac will not buy subprime mortgages
with prepayment penalty terms that exceed three years.
Prepayment penalties -- sometimes fees equal to interest
payments for six months and thousands of dollars -- discourage
refinancing and loan reductions. Combine awful terms with
prepayment penalties and you effectively lock-in borrowers --
even if borrower credit improves and they can now qualify for
better financing.
Single-Premium Credit Life
Insurance
As a condition of making a loan abusive lenders often require
borrowers to obtain single-premium credit life insurance --
even though the loan is secured by the value of the property.
The costs for such insurance are high, in part because the
loan amount decreases each month but the one and only payment
is based on coverage for the full debt and the entire loan
term.
Predatory lenders -- trying to be "helpful" in their unique
way -- will finance that up-front insurance premium by adding
the cost to the mortgage amount. The borrower is then in the
position of creating additional high-cost debt to buy
something which should not be required.
As well, if the loan is quickly paid off or refinanced, the
borrower again suffers because the entire premium was paid up
front.
Credit Reporting
Freddie Mac will not purchase mortgages from lenders who do not
report positive payment information to credit reporting agencies.
In this situation, the borrower is repaying the abusive loan
and wants to obtain financing with better rates and terms. So
the borrower goes to another lender, lender #2 checks the
borrower"s credit file and guess what: There"s no mention of
the borrower"s good repayment record because the first lender
only sends in negative items. Without independent credit data,
the second lender will have a tough time making a loan and the
borrower will be stuck with high-cost financing far longer
then is fair or reasonable.
In effect, Freddie Mac is reducing the ability of predatory
lenders to sell their loans, get new cash, and then make more
loans. It"s a great concept and one which may potentially have
a real marketplace impact.
Other secondary lenders should adopt Freddie Mac"s new rules
for predatory loans, and they should also go further: Why wait
until October? Awful loans that ought to embarrass everyone
are being made today -- and today is when the purchase of such
mortgages should stop.
For more articles by Peter G. Miller, please press here.