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Financial Trap: Scam artists taking advantage of borrowers, mortgage foreclosures increasing

Brokers aren't as heavily regulated as other industries, offering some leeway for the unethical to trick consumers into bad loans. As it stands, brokers also have the right to charge high fees.

State Rep. Esther Golar gets upset every time she sees an abandoned building in her district. She recalls a walk she took down the 6100 block of South Carpenter in Englewood, where she counted nine single-family homes and two-flats that had been hit by foreclosure. 

"Mortgage fraud has really picked up a notch," the Chicago Democrat says, adding that even street gangs have joined the list of shady individuals who prey upon minority and low- to moderate-income homeowners. 

In that neighborhood, as in others across the country, families are losing their only source of net wealth, equity in their homes, through predatory practices in a little-regulated sector of the lending industry. 

Nationwide, foreclosure rates on predatory and deceptive loans have skyrocketed, according to RealtyTrac Inc., a California-based business that tracks foreclosures. According to the company's April report, March foreclosures rose 47 percent over the previous year. That's one foreclosure filing for every 775 households in the nation. In Illinois, the rate of foreclosures rose more than 70 percent since March 2006. In Chicago alone, one out of every 163 households will end up in foreclosure. 

Some, like Golar, are calling for immediate action. Kevin Whelan, communications director for the Association of Community Organizations for Reform Now, called ACORN, says most of the 2 million foreclosures nationwide, actual and predicted, within the last year resulted from three types of loans: so-called subprime loans that often are made to consumers who have poor credit records, predatory loans that hide the true costs and fraudulent loans that trap borrowers into signing fabricated contracts.

Subprime loans aren't illegal, but many homeowners could have qualified for better deals, Whelan says. "Some will argue that the subprime industry is bad for business. However, some subprime loans are necessary, as long as there are fair terms for people to pay back loans."

Nationally, brokers who offer subprime loans tend to target certain communities, according to recent research. The Center for Responsible Lending, a nonprofit North Carolina-based research and policy organization, reports that African-American and Latino borrowers are more likely to receive subprime loans. In 2005, more than 53 percent of African Americans signed up for subprime loans when they bought, improved or refinanced their homes. More than 37 percent of Latinos received subprime loans. The rate for Caucasians was 21 percent. 

The center's report, Losing Ground, concludes that more than 2 million households in the subprime market either lost their homes to foreclosure or hold subprime mortgages that will fail over the next several years. The study estimates a resulting loss of $164 billion in home equity.

Homeowners trapped in bad loans often use the subprime market to refinance. Yet predatory and deceptive lending practices in that market can yield more serious problems. For instance, homeowners might count on a flat interest rate for a year without realizing the rate will fluctuate after that. Or at closing, Whelan says, the broker might tell the client the rate has gone up and that they can refinance later, though that might not be true. 

Munai Newash, on the staff of ACORN Housing Corp. in Chicago, says at least 50 percent of the calls the group receives pertain to broker dishonesty. The national nonprofit organization offers services to first-time homeowners, those considering refinancing and those facing foreclosure. Homeowners with excessive bills, she says, may be blindsided by the promise of a lump sum of cash and lower monthly payments.

"[The brokers] tell the client they're entering a fixed mortgage, when in fact, it's only fixed for three to five years," Newash says. "Then they realize they have an adjustable rate when it's too late and the balloon payment is due." 

Some dishonest brokers feed on the borrower's lack of knowledge. "The brokers think, 'This is what they'll hear, and this is how we'll say it,'" Newash says.

Brokers aren't as heavily regulated as other industries, offering some leeway for the unethical to trick consumers into bad loans. As it stands, brokers also have the right to charge high fees. 

"The lenders do not act in the borrower's best interest," Whelan says. "It's like being on a used car lot where the salesman is trying to get you to pay the most money for a bad car. The lending business should be structured more like real estate, where the broker is acting in the best interest of the consumer."

In cases of mortgage fraud, brokers fabricate or leave out information on the loan application after the borrower has signed.

Newash says mortgage fraud is a big problem in Illinois. "Some call it fraud. I call it deception."

Particularly, she has seen the prevalence of fraud with stated-income loans, when borrowers don't show proof of income, such as federal tax returns, bank statements or paycheck stubs. Sometimes the broker changes the income level to a higher number so banks will believe the consumers can pay the loan amount back. 

"I've had borrowers tell me, 'I never said I made that much,'" Newash says.

However, once the borrower signs the loan contract, the blame falls on him or her. Legally, borrowers can opt out of loans at closing. However, Whelan says families feel pressured to sign because they have to pay off other bills. 

Furthermore, some ACORN clients claim brokers have picked up and moved by the time clients have figured out the scam. Newash calls this a "fly-by-night" move. At the end of the day, the borrower and the lender are responsible, and the broker walks away. 

Whelan also charges legislators with acting too slowly to stop high foreclosure rates. The issue has been addressed in some states, but he says lawmakers shouldn't have waited for a public crisis.

A federal law, amended in 2003, limits the ability of lenders to foreclose on active duty military personnel. Under the law, interest rates are capped at 6 percent for military families that face a loss of income because of active duty. 

Some progress was made nationwide this spring. The Associated Press reported last month that some mortgage lenders have decided to work with distressed homeowners to prevent high rates of foreclosure. As suggested by U.S. Sen. Christopher Dodd, a Connecticut Democrat, some lenders agreed to reduce finance rates, change the terms of high-risk loans and offer refinancing at a lower cost. 

Still, the problem is significant in Illinois, especially in the Chicago area. In March, the Illinois attorney general's office reported that the Cook County Circuit Court identified a jump in foreclosure filings of more than 50 percent in the first two months of 2007. 

Attorney General Lisa Madigan made mortgage fraud a priority in the inaugural speech beginning her second term this year. A few months later, she announced a plan to slow escalating foreclosures in this state, and she helped draft legislation that would enhance protections for consumers facing foreclosure. The measure, introduced by Rep. Daniel Burke, a Chicago Democrat, would prohibit prepayment penalties and excessive refinancing. It also would limit high-cost loans. Madigan plans to convene two statewide summits to explore further financial and legal assistance for those affected by mortgage fraud. 

Last year, legislators attempted to slow down predatory lending. However, responding to public pressure, Gov. Rod Blagojevich suspended the Illinois Predatory Lending Database Pilot Program in January. The legislation, sponsored by House Speaker Michael Madigan, assigned the program to certain areas in Cook County. It was designed to ensure borrowers were educated about the loan process before signing contracts.

"Even though this law was designed to fight predatory loans," Blagojevich said in a printed statement justifying cutting the program short, "it is clear that the program may be negatively affecting the communities it is designed to protect. I am stopping the program until we can find a system that effectively fights predatory lending and protects homebuyers."

The governor relied on a report published by the University of Illinois at Urbana-Champaign that says home sales dropped nearly 50 percent in the designated Chicago areas.

Golar isn't happy the project ended in her legislative district. "It was the best bill we had to fight mortgage fraud in the state," she says. "People were adamantly against it, claiming we were redlining and that the bill was prejudiced in nature because it was designated to 10 areas." 

The pilot program required brokers to enter borrowers' information in a state database within 10 days of their applications. Originally, the borrowers' credit scores would help determine whether they would be required to receive counseling before committing to a loan. 

The governor has since proposed new rules that focus on the lenders, taking the borrowers' credit scores out of the equation. The Illinois Department of Financial and Professional Regulation is responsible for drawing up those rules. Upon approval, they would apply to all of Cook County. Opposing groups have until late June to forward comments to the department or to request a public hearing on the matter. 

Meanwhile, brokers do face some state regulations. Loan originators must take comprehensive tests to measure their knowledge of the loan industry and agree to criminal and credit background checks. 

Golar also has reintroduced a measure this spring that would extend the statute of limitations from three to seven years for consumers wanting to file grievances against brokers and lenders accused of fraud. Last year, the House unanimously approved the measure. Golar, being new to the lawmaking process, didn't ask anyone to pick up the measure in the Senate, so it stalled. This year, she's working with another Chicago Democrat, Sen. Mattie Hunter, to win approval in both chambers. 

Advocacy groups also have stepped in to help consumers. ACORN has started a public campaign to help prevent foreclosures. Whelan says people want to focus on Wall Street and the banks losing money, when the real fallout is in communities, families and neighborhoods. 

"Families are facing not having a home and losing equity in their home," he says. "This is why we see abandoned and boarded up housing in some communities."

Golar says the biggest problem that feeds fraud in the state is that people just don't check things out. "[Consumers] get all this money up front, and the end result is the bank doesn't get all of their money, and you lose your property," she says. "The devastation can be seen in communities throughout the city. 

The buildings are just there." 


By the numbers

• About 80 percent of mortgage fraud cases involve inflated property appraisals or nonexistent properties.

• Fraud plays a role in 20 percent of loans that enter foreclosure.

• Subprime loans account for 10 percent to 15 percent of the lending market, but they are at the root of 60 percent of foreclosures.

• The number of Federal Bureau of Investigation inquiries into mortgage fraud increased by 400 percent from 2003 to 2006. 

Scam artists' favorite tactics 

• Falsify identity documents 

• Misrepresent employment and income 

• Record false down payments 

• Use multiple contracts for a single home repair loan 

SOURCE: The Mortgage Bankers Association Regulatory Compliance Conference Report of September 2006

Illinois Issues, June 2007

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