Tales of Woe: Predatory Mortgage Fees and Products

Davis, CAElaine Roberts Musser says she has pretty much seen it all in her law practice—predatory lending, high mortgage fees and more. Part of the problem, she writes in the 5/20/10 issue of the People's Vanguard of Davis, is that complex mortgage products designed for the educated investor who intends to own property as an investment for only a short period of time are instead foisted upon the everyday Joe who simply intends on buying a single house and staying put for a long time.

For example, payment option adjustable rate mortgages (payment option ARMs) provide the investor with a myriad of options that can easily confuse the average consumer incapable of understanding or keeping pace with such sophistication.

One feature of a payment option-ARM is a low initial interest rate that rises after a few months. Initial payments for the first year are based on the "teaser" interest rate. But once that rate increases, the minimum payment may not cover all the interest, and any interest overage might be tacked on to the principle. The payment must eventually go up—but only according to a pre-determined cap each year. The payment increase, even to the full extent of the cap, may not cover the increase in interest payments. Thus, the payments go up as rates go up, and the cost of a loan increases due to unpaid interest added onto the principle of the loan.

That's just one aspect of the payment option ARM. The product requires the consumer's complete understanding, together with the capacity to properly and adequately manage the product.

Many homeowners have been hurt in the process.

"I saw this myself in my own law practice," Musser writes. "One distressed couple came to me, their house purchased 3 years prior and now 'underwater' (a homeowner owes more on the mortgage than the house is worth at fair market value). They could see no way to get out from under their debt. As the husband sadly said to me, 'I should have known the terms of the mortgage loan were too good to be true no matter what the bank said.' But as I explained it to them, the lending institution was essentially 'hiding the ball,' not revealing the real consequences of the seriously misleading terms in its complex paperwork.

"In another instance, an elderly couple came to me with an extreme tale of woe," Musser continues. "A bank had talked them into putting their house up for collateral to pay off an unsecured debt—an unsecured debt that could have been written off in a simple bankruptcy proceeding. The distressed pair was going to lose their house the two had lived in for over 30 years, which need not have happened."

Musser knows of another elderly consumer who was talked into having her home refinanced 11 times in just five years. The predatory lender kept going after her for additional refinancing (at a profit to the lender) until the money ran out.

"Consumers cannot trust lending institutions any more than they can trust their government to protect them," Musser concludes. "It is imperative that a consumer fully understand any document s/he is signing. And above all, if something sounds too good to be true, it almost assuredly is!"