The Home Equity Loan Zone

Scam Tactic Two – Forgery

Forgery is a key part of many scams. In the Detroit case cited above, the lender requested the title company to prepare two checks payable to the homeowner: one for $61,000 which the homeowner received and a second one for $42,000 which the corrupt lender endorsed with a forged signature and deposited into his own account.

In one California case, two con artists – one working as a financial advisor the other a handyman - convinced an elderly homeowner to take out a reverse mortgage to pay for home repairs. The financial advisor opened an account for the proceeds of the loan and forged the victim’s name to gain access to funds.

Another California case reported in the Santa Cruz Sentinel shows how dangerous it can be to sign “unfinished” documents:

Mrs. Sally Scott is 66 years old. While she receives Social Security and pension checks, she still can’t make ends meet. She saw an ad for a “reverse” mortgage — a loan that allows seniors age 62 or older to receive cash by borrowing against their homes and does not require repayment as long as they live there. Seeking a little financial cushion, she spoke to a mortgage broker about a $10,000 reverse mortgage.

When she received the loan papers, she noticed that the loan amount was $200,000. The broker promised that he’d change the figure, but insisted that she sign the paperwork first. Trusting the broker, Mrs. Scott signed.

A week later, she received a check for $200,000. She immediately notified the broker, who apologized for the mistake and instructed her to wire the money back. As it turned out, the account that Mrs. Scott returned the money to belonged to the broker. He disappeared, leaving her with a mortgage in default and no way to repay the loan.

Precaution: Never sign documents with blanks to be filled in or corrections to be made later. Carefully protect access to your checking and other accounts. Review and reconcile checking account and loan statements regularly. If you find something awry, contact your financial institution immediately.

In the Detroit case cited above, the victim caught on to the scam when she received a loan statement indicating the balance of her reverse mortgage (including interest) totaled $131,000.

Also, take advantage of the free credit reports available to you under federal law. Reviewing your credit report each year is also a good way to catch unauthorized financial activities under your name.

Part 3 Coming Soon

Home equity loan (HEL) ads are all over the place. It seems everyone is touting them as “the perfect way to consolidate debt.” And many people are responding. Between 1997 and 2004, according to Federal Reserve statistics, home equity loans and home equity lines of credit jumped from $416.2 billion to $826 billion. Actually, home equity loan debt is now far greater than credit card debt. Apparently, the ads work, but do home equity loans work?

Of course, you can switch high interest credit card debt for far lower home equity rates and even, possibly, get the chance to deduct on your state and federal incomes tax some of the interest you pay. But aggressive lenders fail to warn homeowners of the serious risks involved with home equity loans.

The most serious questions you need to ask yourself before getting into a home equity loan is “Will I suddenly now be able to control my spending and manage my money effectively? Or am I just going to max out my credit cards once again after I pay them off?”

Well, no matter how good your intentions are, the chances are you won’t clean up your money act. Very few people do. In a recent survey done by Brittain Associates, an Atlanta research firm, nearly two thirds of homeowners who consolidated their debt with home equity loans just ran up their credit cards once again in two years.

And many of these home equity loans were made to people already under financial stress because of low incomes and/or bad credit. Ten years ago, in a much more conservative mortgage market, most of these “subprime” borrowers would not have been considered creditworthy by lenders. They wouldn’t have qualified for a loan, even if they did put up their home as collateral.

But, in todays much more competitive and aggressive mortgage industry, it seems like anyone with some home equity can borrow against it, no matter what their income or credit status is. Depending on who you are, this liberality can be either good or bad.

It can be good, if you have the discipline to manage your spending habits. However, if you don’t have the discipline, you could end up losing the roof over your head. And, if you don’t believe the risk of foreclosure is serious, consider this. Foreclosures are on the upswing from coast to coast. In some states, like California, they’ve actually doubled in the past year.

And debt consolidation home equity loans to less than prime borrowers is a major cause of this increase in foreclosures. Subprime mortgage loans are very risky. At any one time, about 16% are delinquent and over 4% are in actual foreclosure. These default numbers are predicted to go up even higher in the near future.

Why? Because, in order to keep their payments down, many subprime borrowers chose to go with low introductory adjustable rate mortgages. As these ARMs revert to higher fixed rates over the next couple of years, some of these borrowers are going to see their monthly payments increase by as much four or five hundred dollars, which is more than they can probably handle.

If you’re thinking about getting a home equity loan to consolidate debt, you better be smart and be careful. They only really make sense if you’re absolutely confident you’re not going to just run up more debt all over again. And most conservative financial advisors don’t recommend HELs for consolidating debt. Instead, they believe home equity loans should be used only for such things as capital home improvements, emergency medical bills and educational expenses.

There are lots of other safer ways to pay off your credit card debt, so think twice before taking a home equity loan. That is, if you want to keep the roof over your head.

Have you seen the ads? “Home equity loans are the perfect way to consolidate debt.” But the Federal Trade Commission warns, “Borrowers Beware!” And, the warning goes double if you’re a homeowner on a fixed income, a low income or have poor credit.

Why? The answer is simple. Home equity loans are very risky. You could end up losing your home and all the equity you put into it if you’re not able to pay back your loan and you don’t want that.

Sure, you’ll probably get a lower interest rate than you’re currently paying on your credit cards and the interest you pay will probably be deductible on your income tax returns, but you’ve got to understand you’re not going to get something for nothing. If you’re a risky borrower, lenders are just going to charge you a much higher interest rate, extra points or both to cover their risk. These extra charges could make your loan so costly you’d just be getting even deeper into debt.

Why do you suppose aggressive lenders advertise directly to risky borrowers?

The reason is the mortgage industry today is incredibly competitive and there are many predatory lenders who will promise risky borrowers anything – low interest rates, low monthly payments, no credit checks, no appraisals, free toasters – in order to get your business and their hands on your valuable home equity.

Why not? If you pay back your loan, they win. And if you don’t pay it back, they win. They just take your home and all of its equity in foreclosure. They have nothing to lose, but you could end up losing everything, including the roof over your head. And, if you don’t think that’s a possibility, consider the fact that foreclosures doubled last year in the state of California and are increasing all over the country.

Now I’m not saying you shouldn’t consider using a home equity loan to consolidate your debt. That choice is up to you. But, I do highly recommend that you do your homework first. Make sure you read all the ads, check out all the possibilities and carefully compare your options. If you’re not confident you’re making the right decision, definitely go over the small print with a fine tooth comb with a relative or friend you can trust who has more experience in these matters.

Follow this advice and you’ll have a good chance to consolidate your debt, save some money and still keep your “home sweet home.