Los Gatos Weekly-Times

Homes

How homebuyers can avoid predatory lending

By Rose Meily

Foreclosures increased 94 percent last year to 157,417 homes in California, as homeowners struggle with fast-rising home payments and a slow-selling market, a Fair Oaks real estate investment advisory firm reported early this month. California had the most foreclosures filed nationwide, while Nevada had the largest percentage increase at 175 percent last year compared to 2005, according to Foreclosures.com.

Nationwide, almost 971,000 foreclosure filings were reported last year, 51 percent more than the 641,000 in 2005, according to the report.

For most families, buying a home is the biggest purchase they ever make. Unfortunately, not all loans are in their best interest. It's important to learn the warning signs associated with predatory lending, to ask the right questions when shopping for low-cost loans, and therefore prevent the risk of foreclosure on your home.

Possible warning signs of a predatory loan include:

* It sounds too easy: "Guaranteed approval" or "no income verification" sometimes indicate the lender doesn't care whether you can afford to make the payments over the long haul.

* Excessive fees: Make sure fees are typical of those in your market. Because these costs can be financed as part of the loan, they are easy to disguise or downplay. It is common for homebuyers to pay only 1 percent of the loan amount for prime loans. A typical predatory loan may cost 5 percent or more.

* Large future costs: High-risk adjustable rate mortgages with payments that rise substantially after a short introductory period are seldom appropriate for families that already have had problems repaying other loans. Homebuyers should also avoid a large, single "balloon" payment (a lump sum due at the end of the loan's term).

* Closing delays: A lender who deliberately delays the closing may be waiting for the commitment on a reasonably-priced loan to expire.

* Over-valued property: Inflated appraisals can allow for excessive fees to be included in the loan, resulting in the borrower owing more to the bank than the home is worth.

* Barriers to refinancing: Prepayment penalties can make it hard for borrowers to refinance and take advantage of lower-cost loans.

* No down payment loans: These loans may be split into two mortgages, with one having a much higher cost. Homebuyers should be sure they can afford the payments.

* Unethical document management: An ethical lender or broker will never ask you to sign a document dated before the date you sign it.

* Ask the right questions when shopping for the lowest-cost loan: What is my credit score? Can I have a copy of my credit report? What is the best interest rate today? Do I qualify? Is the loan's interest rate fixed or adjustable? What is the term (length) of the loan? What are the total loan fees? What is the total monthly payment? Does this include property taxes and insurance? If not, how much will I need each month for taxes and insurance? Is there an application fee? If so, what is it, and how much is refundable if I don't qualify? Are there any prepayment penalties? If so, what are they and how long do they last?

* If the loan is an adjustable rate mortgage, ask: What is the initial rate? How long will that rate stay in effect? How is the adjusted interest rate determined? (Generally, a specified amount--the "margin"--is added to a current published rate--the "index.") How often can the rate change? How much can the rate go up each year and over the life of the loan? What is the maximum monthly payment you could be required to pay? Would you be able to afford it? Does the loan set a minimum interest rate? Do the monthly payments gradually decrease the amount you owe even if interest rates increase? (With some loans, the amount you still owe can increase rather than decrease each month; this is called "negative amortization.") Does the interest rate increase if your payments are late? Could you qualify for a loan with the maximum interest rate permitted under the mortgage? If not, do you anticipate earning more in the future so you will be able to afford the higher payment? Can the adjustable rate mortgage loan be converted (changed) to a fixed rate without refinancing into a new loan? Is there a charge to convert?

This information is contained in "Shopping for a Mortgage? Do Your Homework First," a brochure published by the National Association of Realtors and the Center for Responsible Lending.

The National Association of Realtors reports after bottoming in the fourth quarter of 2006, existing-home sales are expected to gradually rise through 2007 and into 2008, while new-home sales should turn around by summer.

Annual totals for existing-home sales will be fairly comparable between 2006 and 2007, according to David Lereah, the group's chief economist.

"We have to keep in mind that we were still in boom conditions during the first quarter of 2006 with a high sales volume and double-digit price appreciation," Lereah said. "We are starting 2007 from a relatively low point, so even with a gradual improvement in sales it'll be pretty much of a wash in terms of annual totals. The good news is that the steady improvement in sales will support price appreciation moving forward."

The Realtor association also reports that existing-home sales for 2006 are expected to come in at 6.50 million, the third highest on record, with a total of 6.42 million seen in 2007. New-home sales in 2006 should tally 1.06 million, the fourth highest on record, with 957,000 projected this year.

Builders' confidence appears to be climbing--another sign the housing market is normalizing. Builder confidence rose two points in January, according to the National Association of Home Builders/Wells Fargo Housing Market Index. The index increased from an upwardly revised 33 in December to 35 in January, its highest level since July of 2006.

"Builders are responding to increased buyer interest at the end of 2006 and beginning of 2007," said David Pressly, the builder group's president. "This bodes well for the upcoming spring buying season."

The builder group's chief economist, David Seiders, said the same factors that were evident at the end of 2006 continue to hold true in today's housing market--improving affordability measures, strengthening consumer assessments of home buying conditions and an upswing in applications for mortgages to buy homes.

"Builders are starting to see that the worst is behind them and that buying conditions have improved to the point that greater optimism is warranted," said Seiders.

The recent stabilization of home buyer demand largely reflects reductions in mortgage interest rates since mid-year, lower energy prices following what had been record highs, and solid growth in employment and household income, Seiders explained. Reductions in home prices and widespread sales incentives offered by builders also have helped resuscitate buyer demand.

The current interest rate environment and housing inventory levels present a window of opportunity for potential buyers, Lereah said.

"With all the wild projections by academics, Wall Street analysts and others in the media, it appears that much of the housing sector is experiencing a soft landing," Lereah said. "Despite the doomsayers, household wealth will not evaporate and the economy will not go into a recession. If you're in it for the long haul, housing is a sound investment."

Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.silvar.org. Send questions on any topic to rmeily@silvar.org.