April 24, 2004

Roy and Liana White live in Savage, miles from inner-city poverty pockets where predatory lenders concentrate, but that gave them no immunity from a refinancing nightmare that led to bankruptcy. Roy owns a tire business that he supplements with winter plowing. Liana drives a school bus. During a spell of low income three years ago, they fell behind on payments for their 1950s-era three-bedroom rambler and refinanced to catch up. That loan had a higher interest rate, and their attempt to refinance again to get out of it pretty much emptied their pockets. The couple now is getting help from both a nonprofit agency and from housing counselor Denise Maki at Carver County's Housing and Redevelopment Authority.

"The Whites are not unique," Maki said. "Suburban telephones ring daily with offers of easy solutions to complex financial problems. They include refinancing your home in ways that may place unsecured debt on your mortgage with the promise of lower payments and an affordable resolution to a financial crisis." The Whites' kind of trouble is occurring more frequently in Twin Cities suburbs.

When the local "Don't Borrow Trouble" program to prevent predatory lending began a year ago, the program's target areas were neighborhoods of Minneapolis and St. Paul in which predatory lenders have taken advantage of cash-strapped homeowners or people desperate to buy homes and typically unsophisticated about the process. Those neighborhoods got "Don't Borrow Trouble" billboards in English and Spanish and received most of the program's 50,000 brochures, "door hangers" and posters. Radio and television ads ran metro-wide, and they evidently had an effect. By the end of the program's first year, the "Don't Borrow Trouble" help line (612-312-2020) had received 700 calls. The surprise was that 44 percent of those calls came from the suburbs. 

A majority of Maki's foreclosure clients got into trouble because of lengthy unemployment. "They tend to be a little better educated. They tend to be much higher income just by the nature of housing out here," said Maki, who also counsels people in Scott County. Often, these clients don't get back to work as soon as they expect or they get lower-paying jobs, making it impossible to keep up their house payments. This leaves them vulnerable to predators' offers of "help" that lowers monthly payments but often has high interest rates, heavy loan costs and prepayment penalties that limit the borrowers' ability to refinance with a legitimate lender for better terms. 

In 2003, Minnesota limited the prepayment penalty period on new loans to two years, but some borrowers still have older loans with penalties that might run up to five years, Maki said. "So when they do get back on their job and want to refinance, they may find it'll cost them, for example, $16,000 to get out of the predatory mortgage. And that's not an uncommon dollar amount." A few years ago, Maki's office had four or five foreclosure clients at a time. Last week, it had 20. 

The new victims

"Predatory lenders don't discriminate," Maki said. "They'll work on the poor, the affluent, the urban and the suburban." Some victims referred to the Anoka County Community Action's homeownership program by the "Don't Borrow Trouble" campaign "are people whose houses are worth between $200,000 and $300,000, and their house payments are well over $1,500 a month," said director Jan Backlin. "Most of them had high-paying jobs and then they've gotten laid off. ... Then the unemployment runs out and their creditors get after them, and then the predators get after them." Backlin said some people run into trouble because of medical problems that take them away from work or leave them with big bills. Others are entangled by overspending, addiction and succumbing to advertising that suggests that new toys will bring happiness. She also sees young people who buy a house they can't afford. They think "they have to get a home like mom and dad's, not remembering the stories about how mom and dad started with a small house and then worked their way up to the big house," Backlin said. The combination of shame, fear of losing the home and often a desire to fix the problem before the neighbors find out makes these people facing foreclosure easy prey.

Falling into the trap

The desire for a quick solution even leads some people to use their credit cards for mortgage payments - at much higher rates of interest - until the cards hit credit limits, Backlin said. "Some people create their own downfall," she said. "They read ads for refinancing at 3 percent or something" and ignore details about total cost and prepayment penalties. Too often people take a commercial or ad from the paper as a wonderful dream come true, use their equity in their home to pay down credits cards that are "maxed out," to get enough money to pay off the bills from their overspending. Then they discover that the new mortgage is for almost the entire value of their house, Backlin said, and "they have started using their credit cards again. They start reading the paperwork again and find they have a prepayment penalty, so they can't refinance again, and they've borrowed trouble." In desperation, people can forget that something that seems too good to be true probably is. "They listen to the person who's pitching it [and believe] 'It's easy and I'm going to come out ahead here,' " Backlin said.

Escape is costly

The Whites found themselves in such a trap. Their rambler was appraised for refinancing at more than twice the $109,000 they owe on it, Liana said, but that equity remains locked up. In 2001, Roy's plowing service hadn't done well, and they began falling behind on house payments. They decided to refinance, figuring that would let them use some of their equity to catch up on the mortgage and bills, and have money left over to improve their home. Liana picked a lender out of the telephone book, "called, and they said, 'Sure, we'll help you,' " she recalled this week. Whether the loan can be called predatory might be disputed, but they went from a mortgage at 9 percent interest and a monthly principal and interest payment of $1,083 to a loan at 11.5 percent and payments of about $300 a month more. Because of ongoing negotiations with the lender, Liana would not identify the firm for print, but housing counselor Maki has seen the loan documents and affirmed Liana's account. 

In 2002, Liana decided that she'd refinanced into a too-costly loan and began calling other mortgage companies to refinance again. In talking with them, she discovered she had a three-year prepayment penalty that at the time would have been more than $9,000. The companies with which she was talking called the one holding the mortgage to ask about payoff, which evidently led to a call from that firm to Liana. "They said, 'We can refinance you a whole lot easier than going with somebody else,' she said. So they went ahead, closing March 15, 2003, on a transaction that she said had $7,482 in "settlement costs," including a prepayment penalty they'd expected not to have to pay by refinancing through the same company. Then the mortgage company called to say it needed more money to pay off its first mortgage on the house, and closing would have to be done over again on March 20. This time, she said, "settlement costs" were $8,347, an increase of $865.

At the second closing, she was told they were getting only $347 in cash, Liana said. She asked the closer why she didn't get a check for that amount, and was told that it would come in the mail and that their first payment on the new loan wouldn't be until May 1. In the meantime, she said, she was told not to send in monthly payments. In mid-April, she received a notice that the lender was foreclosing. "By the time we got it straightened out, we were into May," she said. "They weren't going to honor the second closing. We now were six months behind" in mortgage payments. The mortgage company gave them a forbearance plan to make up the missed payments, leading to a monthly principal and interest payment of $1,856 starting last May.

"By August, we couldn't pay anything except the house payment," she said. "There wasn't anything left." They filed for bankruptcy in June. She'd like to get out of the situation by refinancing with a company she trusts, but "we now have a mark on our credit report saying we're six months in arrears even though we've made every payment. The 18-month forbearance will be up in August ... but meantime, no one else will touch us because the credit report is bad."

Liana said she feels "frustrated and robbed, and it's put my house, my kids and everybody out of a lot of things over the years." She has five children. Two, age 25 and 23, are on their own, the latter a Marine just back from Iraq. At home are children 14, 11 and 6. "I have two grandchildren on the way," she said, but because of the large mortgage payments, "I can't give them half the things I want to give them. Everything I have goes to [the] mortgage. "I hope somebody reads this and it saves them the misery I've been through, " she said. "Beware of predatory lenders."

Neal Gendler is at ngendler@startribune.com.

How to spot predatory lenders:
1. None of your questions are answered. Or their answers don't make sense.
2. They pressure you to sign things before you're ready or rush you through the paperwork.
3. They don't explain or tell you about all the costs for getting a loan.
4. Things change at the closing. You're not getting the loan you were promised. Walk away.
5.  They want you to borrow more money than you need. 
6.  They make you feel as if you don't have choices, as if other lenders won't give you a loan.
7.  They give you a quick yes, but it might not be the best loan for you.
8.  You have a feeling that something's not right. Trust your instincts. 

Resources: http://www.dontborrowtroublemn.org or call 612-312-2020 for free advice.