It has come sadly to my attention home buyers right here in Chaffee County have fallen victim to possible predatory lending practices.
It also happened to my niece in Denver.
This abusive lending practice can have many forms, but usually preys on individuals with weak or blemished credit scores. A typical predatory loan may look like an interest only loan or a loan with very high fees attached.
On competitive loans, fees should be at or around 1-2 percent of the loan. On predatory loans, fees can total anywhere from 2-5 percent of the loan balance.
This practice often surfaces when a builder attempts to keep their staff employed, even though the market is flat or soft. To create a false demand, the builder will also become the banker.
This strategy is really very smart "if" you are the builder. The builder gets the money for building the home, plus the money for being the banker.
However, it is not good for the ill-informed consumer or the surrounding community. These types of loans make it nearly impossible for the homeowner to build any equity in their house.
Obviously, if a home owner never pays the principal down, and at the same time a market is being flooded with similar newer homes, they will actually end up with a mortgage product that has a higher loan balance than the value of their home.
Many homeowners have been misled to think a house is their greatest asset. I have argued for years that if homeowners have zero to very little equity, their house is actually their largest liability.
The banker will show an asset on their balance sheet called mortgage receivable for the entire value of your home. (Yeah, lender!) The homeowner will show a liability on their balance sheet called mortgage payable for the entire value of their home. (Boo, homeowner!) I know what you are thinking, "but Janice what about appreciation?"
Again, that sometimes works, but not when the supply exceeds demand, or if the "builder/lender" is predatory. We certainly have plenty of homes on the market in all price ranges in this county.
Therefore, if predatory builder/lending practice continues to be tolerated in this small fragile market, serious harm will result.
The only ones who will be immune from such a downturn will be home owners who have either a very special lot or live in a special neighborhood like Cottonwood Meadows or South Main.
Supply is being supported by a false demand, but can come crashing down like a neighborhood made of cards. So, buyers beware before you buy!
Predators will also convince home buyers of all the taxes they are going to save by buying their home and paying thousands of dollars of interest to the builder.
First, usually home buyers with tarnished credit who require builder financing, do not have a big end of year tax burden and may even be in an income tax bracket where they do not pay any income tax after all the child care tax credits and so on.
So this is another ridiculous selling point to create false demand and trap a home buyer with tarnished credit.
This type of unethical lending practice is being addressed at the state level through Senate Bill 203 and House Bill 1322. Colorado is experiencing one of the highest foreclosure rates with most of the foreclosures occurring in these exact types of developments.
Real estate agents should be careful since Senate Bill 203 and House Bill 1322 will also allow the unsuspecting buyer to sue the real estate agent who sold the house if the agent knew that the loan was "unconscionable."
That's the tough part I guess, the courts will determine what is unconscionable. However, if I was a real estate agent I would take the high road and follow my conscience before I would recommend a builder/lender combination or at least check your liability insurance coverage.
If you feel you may be a victim of predatory lending, you may file a complaint with the Attorney General's Office at http://www.ago.state.co.us/consumer_protection. I hope this helps.
Janice Martin is co-owner of Headwaters Energy and Finance in Buena Vista.