Lending fraud often triggers financial ruin

Unscrupulous lenders, brokers and appraisers are behind some foreclosures.
YOUNGSTOWN -- She'd never noticed how badly worn and outdated the siding and windows on her East Side bungalow were until a fast-talking contractor came around.
Now the mentally disabled homeowner has new windows, new siding, and a $585 monthly mortgage payment.
That's more than twice her mortgage before the remodel, and impossible to pay on her Social Security disability income of $552 a month.
It's the kind of case that makes Cherie Howard's blood boil. She's an attorney for Northeast Ohio Legal Services, and she's representing the woman in a legal fight to keep from losing her home to foreclosure.
Howard believes the homeowner was victimized by an unscrupulous contractor who overpriced the work and a dishonest mortgage broker who overestimated her income on a refinancing loan application and hired an unethical appraiser to exaggerate the home's value.
"The contractor made money, the broker made money and the appraiser made money," she said.
NOLS provides legal services for people who qualify under low-income guidelines, and Howard said predatory lending practices are often to blame when the agency's poor, disabled or elderly clients face foreclosure.
What it means
Predatory lending practices are hard to define, she said, but in general the term is used when brokers or lenders arrange a loan that the borrower clearly cannot afford. The mortgage holder then loses the property in foreclosure, along with all the equity they had already paid into it.
Mortgage fraud takes many forms, from adding unreasonable balloon payments, fees, prepayment and late charges to falsifying loan applications and exaggerating appraisals.
A study by the U.S. Treasury in five major cities showed that most victims in lending scams are poor, minorities, elderly or women, Howard said. No study has been done to confirm that trend locally, she said, but it seems to be true, based on victims the NOLS attorneys see.
Almost without exception, Howard said, the unscrupulous lenders NOLS has seen are from out of town, often from out of state. "We don't see these practices among local lenders," she said.
What likely happened
Howard wouldn't identify the disabled East Side woman for privacy reasons, but here's how the attorney believes the fraud worked:
The woman bought her house in 1999 for $30,000 and financed the mortgage with a local bank, which appraised the house at $30,000. She was living with an older family member at the time.
About 18 months later, a home improvement contractor convinced the woman that her house needed new siding and windows, estimated the cost at $30,000 and promised to arrange new financing. It's unlikely that a local bank would have agreed to such a loan, Howard said.
The contractor brought in a mortgage broker whose appraisers appraised the house's value at $105,000. The broker also exaggerated the homeowner's income on the loan application by combining it with that of the relative, who has since been placed in a nursing facility.
Next, the broker found an out-of-town lender willing to refinance the woman's mortgage, rolling in the home improvements and hefty fees for himself.
Loan papers were signed at the woman's kitchen table, the attorney said, and like many victims of mortgage fraud, the homeowner wasn't aware she had refinanced her home.
Bundled mortgages
The out-of-town lender probably doesn't know it is lending $60,000 for a house worth half that price, but Howard alleged the lender probably won't suffer in the transaction. Many lenders bundle large groups of home mortgages and sell them as investment vehicles, so there's a good chance the loan was grouped with others and sold long before the homeowner defaulted on the payments.
"If a $60,000 mortgage on a house appraised at $105,000 is bundled with hundreds of other loans, ... [the whole package] looks like a good investment," she said. "All these parties are putting money in their pockets."
Debbie Rodgers, director of dispute resolution at the Better Business Bureau of Mahoning Valley, said it's important for home buyers to check out a prospective lender thoroughly before they sign anything.
"If they're facing foreclosure or bankruptcy, we can't get involved. That's a legal matter," she said.
"But if they contact us before they sign any contracts, we might be able to keep them from getting into a mess."
What BBB will do
BBB staff can help a would-be borrower check out the lender's complaint record, whether it's local or out-of-town. Borrowers can also check contractors' and lenders' records themselves on the BBB Web site, www.bbb.org.
The bureau has pamphlets on how to choose a lender and how to spot predatory lending practices.
Unfortunately, BBB phone counselors often hear from homeowners who call too late, after they've fallen victim to a predatory lender or unscrupulous contractor and face foreclosure or bankruptcy.
"What's really sad is when someone preys on an older person, someone who grew up in an era when a handshake meant something," Rodgers said. "These days, it doesn't mean a thing."