The housing crisis is a simple thing, people involved in the financing of home ownership decided they had limited ways of making ‘big’ money. One of their strategies, to make more than small change, was to entice people who had very little into borrowing or going a little bit more into debt, involving obligations they may not have been able to pay back very easily. These predators then would lie about the riskiness of those loans as they ‘securitized’ them and sold them off to other equally gullible corporations.
It’s a scam.
Grit TV had one discussion of how some citizen advocates have been trying to take these scammers to court.
I thought it would be important to review some warnings people have made about mortgage lenders. Here’s one such list of ‘tips’ for the wary,
HOW TO IDENTIFY PREDATORY MORTGAGE LOANS
There are several "warning signs" that a loan may be abusive or predatory. Not all loans containing one or more of the following attributes are predatory loans. However, the features listed below are often associated with such loans.
- Misrepresentation or fraud in the solicitation, marketing or origination of the loan. For example, a lender may falsify a loan application to make it appear that an elderly applicant has enough income to qualify for a loan. A lender who desires to profit from a homeowner's equity by making a loan the elderly homeowner cannot afford to pay, and which will ultimately lead to foreclosure, may engage in this behavior.
- Home improvement scams. Home improvement contractors often steer elderly homeowners to predatory mortgage companies under the guise of arranging financing to pay for the home improvement. The work is generally overpriced, and often incomplete or done in an extremely shoddy manner. The contractor may obtain a commission for acting as a broker on the loan.
- High interest rate. In many cases, the high interest rate cannot be justified by the risk and costs of providing credit to elderly homeowners. Predatory lenders often disguise the true costs of loans by using adjustable rate mortgages having an artificially low interest rate and monthly payment, called a "teaser" rate, for a limited period of generally six months to two years. For elderly homeowners on fixed incomes, an increase in the monthly payment after the initial period can be devastating.
- High closing costs and fees. Closing costs include points, broker's fee, document preparation fees, appraisal and attorney fees which are deducted from the proceeds of the loan. These fees may be much greater than the actual cost of the item or service provided, or duplicative of other itemized fees and costs.
- Balloon payments. A balloon payment is a large lump sum of money due at the end of the term of the loan. Homeowners who cannot meet the balloon payment will lose their home to foreclosure unless they refinance the loan, often at an excessive cost.
- Excessive prepayment penalty. Lenders often impose excessive and unfair prepayment penalties to make even more profit if the homeowner attempts to refinance.
- Multiple refinancing. This practice is also referred to as "flipping." Lenders encourage homeowners (especially those with balloon payments described above) who are in need of credit, or who are in default, to refinance their loan with the lender or an undisclosed affiliate of the lender. The new loan pays off the balance of the existing loan, including any prepayment penalty embedded in that loan. The resulting loan has a higher principal balance and a new set of closing costs and fees based on that higher balance. A loan may be refinanced several times in this manner. Each time the loan is refinanced the lender receives a new set of closing costs and fees, which leads to depletion in equity with littler or no benefit to the elderly homeowner.
- Credit insurance. Lenders will sell credit life insurance, credit accident and health insurance, or involuntary unemployment insurance, as part of the loan. This insurance is extremely profitable for the lender, as the lender often owns the insurance company, or receives a commission for the sale of the insurance. In addition, the insurance premium is financed over the life of the loan which increases the total interest charged on the principal. Because it is profitable, credit insurance is often sold to individuals who will not benefit from it.
- Negative amortization. The lender structures the loan such that the monthly payments do not cover the amount of interest due each month on the loan, and the principal balance therefore increases each month. At the end of the loan term in a negative or non-amortizing loan, the borrower owes more than the amount originally borrowed. Mortgage broker kickbacks. Borrowers pay a fee to a broker to obtain the best available rate on a loan; the fee is usually financed as part of the loan. The broker, however, may also receive a separate fee or a commission from the lender for referring the homeowner to the lender. Instead of receiving the best rate that he or she qualifies for, the borrower may pay a higher interest rate because the broker is receiving a kickback from the selected lender. The fee the lender pays to the broker is passed on to the homeowner in the form of a higher interest payment over the loan term. On loan documents this is referred to as a yield spread premium.
- Making loans the elderly homeowner cannot afford to repay. These loans are made based solely on the amount of equity in a property, and are made to individuals who do not have the income to repay the loan. Elderly homeowners are particularly vulnerable to this practice because they have limited or fixed incomes and have substantial equity in their homes.
- Refinancing unsecured debt. Lenders encourage homeowners to finance or consolidate unsecured debt, such as credit cards or medical costs, into the mortgage loan. Homeowners are told it is a way to lower monthly payments and increase their tax deduction. Lenders do not mention that the higher home-secured debt burden increases the risk of foreclosure when the elder faces financial distress. http://www.consumerlaw.org/initiatives/seniors_
- initiative/helping_elderly.shtml
I also thought it useful to look into the idea that the federales might be out trying to catch some of these scammers and drag them to court. Here’s a story about that,
The ongoing mortgage foreclosure crisis has sparked a cottage industry of so-called "foreclosure rescue" companies. But advocates and government officials warn that a significant number are little more than fraudulent operations designed to separate distressed homeowners from their money, and sometimes their houses as well.
"They prey upon the financially unsophisticated," said Gail Cunningham of the National Foundation for Credit Counseling. "Anyone can easily fall victim to such scams. When you're hurting, we may all become financially unsophisticated."
Many of these companies have popped up as the mortgage meltdown accelerated, said Gary Almond of the Better Business Bureau in Los Angeles, one of the areas hardest hit by the housing crisis. "As the degradation in the market progressed, more (companies) got on the bandwagon," he said.
Because of the role the mortgage industry plays in the nation's economy and the types of crimes mortgage fraud represents, these companies have even drawn scrutiny from the FBI. The feds currently have nearly 2,350 mortgage fraud cases, up almost 400 percent from five years ago.
"With people losing homes, you're at your most vulnerable," said Roscoe Howard, a Treasury Department spokesman. "It's a lot like being a poor swimmer and being thrown into a lake -- you're going to reach for whatever you can."
Even for wary consumers, it may be hard to tell if the line being thrown by a company will sink you.
http://www.commercialappeal.com/news/2009/may/28/housing-crisis-breeds-scams/
People have been scammed. The Feds are out trying to bring them to justice. But, why do we have this problem? Don’t banks and mortgage companies have enough legitimate work to do? Why do they have to turn to scamming?
I suspect there’s more to it than individual decisions to rip people off. The culture has changed to one where making a legitimate buck isn’t enough. You have to make ‘big bucks.’ And in such a society, shouldn’t we expect the little, less connected, people to suffer at the mercy of these corporations of scammers? I think so.
So, what is the issue? Isn’t it about what kind of a society we have here now? Are we living in any kind of society that supports or protects us? Is this the kind of place we really want to live in?
Let’s go to Chomsky and through him Dewey and Russell on this issue,
BARSAMIAN: At the Mellon lecture that you gave in Chicago... you focused primarily on the ideas of John Dewey and Bertrand Russell [regarding education]...
CHOMSKY: ... These were highly libertarian ideas. Dewey himself comes straight from the American mainstream. People who read what he actually said would now consider him some far-out anti-American lunatic or something. He was expressing mainstream thinking before the ideological system had so grotesquely distorted the tradition. By now, it's unrecognizable. For example, not only did he agree with the whole Enlightenment tradition that, as he put it, "the goal of production is to produce free people," -- "free men," he said, but that's many years ago. That's the goal of production, not to produce commodities. He was a major theorist of democracy. There were many different, conflicting strands of democratic theory, but the one I'm talking about held that democracy requires dissolution of private power. He said as long as there is private control over the economic system, talk about democracy is a joke. Repeating basically Adam Smith, Dewey said, Politics is the shadow that big business casts over society. He said attenuating the shadow doesn't do much. Reforms are still going to leave it tyrannical. Basically, a classical liberal view. His main point was that you can't even talk about democracy until you have democratic control of industry, commerce, banking, everything. That means control by the people who work in the institutions, and the communities.
These are standard libertarian socialist and anarchist ideas which go straight back to the Enlightenment, an outgrowth of the views of the kind that we were talking about before from classical liberalism. Dewey represented these in the modern period, as did Bertrand Russell, from another tradition, but again with roots in the Enlightenment. These were two of the major, if not the two major thinkers, of the twentieth century, whose ideas are about as well known as the real Adam Smith. Which is a sign of how efficient the educational system has been, and the propaganda system, in simply destroying even our awareness of our own immediate intellectual background.
BARSAMIAN: In that same Mellon lecture, you paraphrased Russell on education. You said that he promoted the idea that education is not to be viewed as something like filling a vessel with water, but rather assisting a flower to grow in its own way...
CHOMSKY: That's an eighteenth century idea. I don't know if Russell knew about it or reinvented it, but you read that as standard in early Enlightenment literature. That's the image that was used... Humboldt, the founder of classical liberalism, his view was that education is a matter of laying out a string along which the child will develop, but in its own way. You may do some guiding. That's what serious education would be from kindergarten up through graduate school. You do get it in advanced science, because there's no other way to do it.
But most of the educational system is quite different. Mass education was designed to turn independent farmers into docile, passive tools of production. That was its primary purpose. And don't think people didn't know it. They knew it and they fought against it. There was a lot of resistance to mass education for exactly that reason. It was also understood by the elites. Emerson once said something about how we're educating them to keep them from our throats. If you don't educate them, what we call "education," they're going to take control -- "they" being what Alexander Hamilton called the "great beast," namely the people. The anti-democratic thrust of opinion in what are called democratic societies is really ferocious. And for good reason. Because the freer the society gets, the more dangerous the great beast becomes and the more you have to be careful to cage it somehow.
From this I take it that one of the effects of becoming less democratic and more under the thumb of business, in the sense Chomsky refers to here, is the efforts by mortgage companies to take advantage of poor and old people in order for these companies to make bigger bucks.
The resistance to doing something effective about the way these businesses take advantage of people has do do with the unwillingness on the part of our political leaders, e.g., the ones in the pockets of those same corporations, to ‘uncage the beast',’ so to speak. They can’t start making businesses stop scamming the population without giving some kind of reasonable defense of democratic society which, as Dewey and Russell argued, requires that the people control the corporations, not the other way around.
I am sometimes attracted to the libertarian way of being consistent about ‘freedom’ being non-interference by government, and how that implies smaller government, less intertwined with business. But, as described, less government in a society oblivious to and supportive of corporate scamming, would be a hellish existence for its victims. The population would be free to be scammed. Free to be propagandized. Free to suffer.
Taking the scammers to court might, in the short run, be helpful to the home owners being ripped off, but, in the long run, we have to articulate an account of things that would be better than what we have now.
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