By Andrew Gordon
What happens to the pharmacist who fills a prescription without a doctor’s signature?
Or to the gun seller who falsifies information on a buyer’s application?
These people are licensed. It means they’ve been trained in how to dispense drugs or sell guns. And it also means that they have a legal obligation to follow mandated procedures.
If they don’t, they could go to jail.
Of course, that’s only if they’re caught ...
This brings us to the mortgage business.
Is there anyone left in America who doesn’t think there was fraud committed by licensed lenders and brokers? And that this fraud took place on a massive scale?
I bet you either know somebody who is in danger of losing their home, or you have heard stories from friends and family of people in this predicament.
I had lunch with a friend of mine on Saturday. He was telling me about his father who bought a house in Florida for more than $300,000. He had been badgered almost every single day by brokers encouraging him to take out a home mortgage. He finally relented.
He was working part-time. How he could qualify for a $300,000 loan is anyone’s guess.
But I think guessing can get us pretty close to the truth. Some of the numbers on the loan application were inflated. They had to be to get the paperwork approved by the bank’s automatic underwriting system.
Now I don’t know this for a fact. And I don’t know who did the inflating – my friend’s father or the broker. But even if it were my friend’s father, I suspect just a little double-checking by the broker could have unearthed much more modest numbers.
My friend’s father has been in and out of the hospital recently. He fell behind on his payments long ago. Now his house is in foreclosure and on the auction block for $50,000. So far, there have been no bids.
This is a tragic situation. And variations of it are being played out all over the country. But the variations can be very different. Some foreclosed homes were vacation homes. Some were new homes. Some were upgrades over previous homes. And some were bought by investors who wanted to sell them quickly for a handsome profit.
We have some very sophisticated buyers caught up in the housing contraction. And some are on the other end of the spectrum. We have wealthy buyers and buyers of very modest means. We have buyers in booming markets (like Phoenix) and buyers in depressed areas (like parts of Detroit and Cleveland).
Some of these buyers are more to blame than others. And I’d say that my friend’s father wasn’t entirely blameless. But regardless of the degree of culpability, all of them were enabled by a supposedly lax lending system. But “lax” doesn’t do justice to what happened.
How about “deliberately sabotaged?”
A memo just came to light that shows just how “lax” those standards were. Its title is “Zippy Cheats & Tricks.” Zippy is Chase’s automatic underwriting system for mortgage loans. Loans must be approved by Zippy to go through.
“Never fear,” says the memo. “Zippy can be adjusted (just ever so slightly.)” All brokers had to do was group tips, bonuses and other stuff into base income. If that didn’t work, says the memo, just inflate stated income by “$500 to see if you can get the finding you want.”
In the interests of disclosure, I have to admit that Chase was the bank that approved my “no-doc” refinancing loan in the mid-1990s.
You see, I’d do anything to avoid paying taxes. (I know I’m not alone in this. I just think that I should get to spend the money I earn ... or at least as much of it as possible.)
Thursday, 3 April 2008
Skinning the Mortgage Market
Monday, 31 March 2008
Beware Payday Loans
Payday Loans: Dangerous Consumer Rip-Off: "Dangerous Consumer Rip-off
Payday loans, also called "cash advance loans," "check advance loans," "postdated check loans," or "deferred-deposit check loans," may seem like an easy solution to a temporary cash shortage, but for many people, payday loans are the beginning of a vicious and very expensive cycle that they find difficult if not impossible to get out of.
Here's an example: Robin was $200 short of having enough money to pay her bills, so she borrowed it from a payday lender who charged her $60 for up to 15 days. Her plan was to repay the money when she received her next paycheck in two weeks. When the time came, she still didn't have enough money to pay off the amount she borrowed plus the $60 fee, so she paid an additional $60 fee and rolled her payday loan over for another two weeks.
The cycle continued, and at the end of six months she had paid $720 in fees and still owed the original $200. Her hopes of getting out from under this black cloud are slim.
The interest rates on payday loans range from 300% to over 1,000%. Compare that to the interest rate on a small personal loan from a bank, which tends to be more than ten times lower than the rates on even the lowest rate payday loans. Even a relatively high-interest rate credit card has a much lower rate than a payday loan.
Who Uses Payday Loans?
Payday lenders target:
* younger consumers with limited understanding of finances
* consumers who are deeply in debt
* consumers who are struggling to meet their day-to-day financial obligations
* those who have a history of using high-risk lenders
Examples of Payday Lenders' Fees
200cash.com will advance you $200 for up to 15 days for a fee of $60. You can get up to four 15-day extensions for $60 each (for a total of $240 in fees). If the fees cause you to have insufficient funds in your bank account, you'll be charged a $25 returned check fee by the company in addition to your bank's returned check fee.
How Do Payday Loans Work?
Typically, you request a payday loan for a short period of time, usually one to four weeks. You show proof of employment and identification and write a postdated check for the full amount of the amount you borrowed plus the payday loan fee, which you leave with the lender. The fee may seem reasonable: $15 to borrow $100 for two weeks, for example. However, the annual interest rate on that loan is 360 percent. It may seem worth it if you're in a bind, but people often extend the loan month after month and end up paying grossly inflated annual interest rates and end up in worse shape than when they borrowed the money in the first place.
Are Their Options to Payday Loans?
The US Federal Trade Commission’s recommendation is to avoid payday lenders. They recommend these alternatives for safer and less expensive loans:
* Contact a local credit union for a small loan.
* Ask for a pay advance from your employer.
* Consider a loan from family or friends and get the terms of the loan in writing.
* Use a credit card advance.
* Request additional time to pay the bill from your creditors instead of taking a payday loan.
* Find out what your options are before you need a short-term loan.
* Look into overdraft protection on your bank account so if you don't have enough funds to cover a check you write, the bank will pay the check and you'll avoid insufficient fund fees and returned check fees.
* See credit counseling.
* Plan ahead to prevent financial emergencies (see below).
Prevent Financial Emergencies
Take a close look at your income and expenses. Track where your money goes and find ways to save. It only takes small amounts in a number of different areas to add up to enough to build a small savings account that you can turn to in a bind instead of turning to high-rate lenders like pay day loan companies.
If you need help preparing a budget, see Budgeting 101 for easy-to-read articles about getting motivated, simple steps for setting up a budget, sample budget worksheets, ideas for finding ways to cut costs and save money, and more.
The Darker Side of Payday Loans
Payday loans are deceptive. Since you're forced to turn over a postdated check, you may be harassed, threatened, or subjected to collection practices. The payday lender may deposit the check before the date you agreed on, causing your check to bounce and forcing you to pay more fees. Because people who use payday lenders are usually in desperate financial situations already, they may have trouble repaying the original loan and they continue to extend it until they've paid more in fees than the amount of their original loan.
The high rates of payday loans make it difficult for many borrowers to repay the loan because they are already in a desperate financial state. They keep extending the loan and end up paying more in fees than they originally borrowed, putting them in worse financial shape than when they started.
