Loans by Themselves Aren't Necessarily Predatory, but a Loan Officer Can Make a Predatory Loan.
Mortgage loans are not made just to foreclose on someone. If the lender makes a loan, then forecloses, something has gone very wrong. Foreclosing is an expensive, long-drawn-out process. Some states require lenders to go to court, in front of a judge, to get their collateral back. Other states have other methods. Whatever method is used to recover the home, a foreclosure is bad news all around.
The origin of the mortgage term predatory is hard to pin down, but the term has made headlines over the past few years. A predatory loan, by loose definition, is one that is designed to take advantage of a homeowner by pressuring her to take out a loan that she doesn't want or need, stripping equity from the borrower with continuous refinancing, or charging high fees during the course of a loan closing.
I say "by loose definition" because there is no universal, state-to-state definition of a predatory loan. Various state laws have been enacted to protect the consumer from predatory lenders. But loans aren't designed with the intent to foreclose. Loans are designed to be paid back, or the lender won't be a lender for very long. Lending and foreclosing don't belong together.
Thus, the loans themselves aren't predatory. It's the greedy, no-good loan officer who makes a loan predatory by charging high fees and stripping equity. There's a big difference between the loan officer's interest and the ultimate lender's interest.
A loan officer makes money when the loan closes. And that's it. Move on to the next loan. A lender makes money on that same loan when it collects interest each month or sells the loan to another lender, who will also make money every month. A loan officer may concentrate only on closing that one deal, making as much as he possibly can on it, and then finding someone else to prey on.
I remember a telephone call I got one day from a lady who said that she wasn't happy with the mortgage company she was working with to close her deal. At the time, a 30-year mortgage rate could be found in most places at around 6.50 percent. But she was being quoted closer to 7.00 percent, and she was also being charged 3 points because her loan officer said that her credit score was pushing up her rate.
I discussed her situation with her, and I couldn't figure out why she was being charged such a high rate and so many points. I could guess that the loan officer was trying to shaft her with all those points, but the rate didn't match either. The only thing I could do was take a loan application from her, run it through the AUS, and see what came up. But, again from what she told me, she shouldn't have been given such rotten terms.
Her loan went through the AUS, and in just a few moments I got her approval for an everyday 30-year fixed-rate loan at around 6.50 percent, without any points or origination fees. The loan officer she had been working with was simply trying to take advantage of an old lady, and was probably making close to 5 points total on her when you figured in the higher rate.
The loan officer took a regular loan and made it predatory. The loan wasn't a subprime loan; it had nothing to do with credit. The loan officer was simply trying to take advantage of this lady to the tune of about $7,500.
There are bad loans out there, or at least loans that are constructed to be bad by the loan officer. How do you know if a loan is predatory? If you're getting charged anything above 2 discount points on any loan, I'd:
Question it Shop it
If you're getting quoted 4 points plus several hundred dollars in lender fees, just ask the loan officer, "Pardon me, is this loan considered predatory?" Asking that question will raise several red flags with the loan officer. First, the loan officer will be surprised that you even know to ask the question, and second, it will also make the loan officer think he's about to get turned into the authorities.
Shop it by calling other lenders in the area and getting quotes from them. Make a few phone calls, tell the loan officer that you've applied for a mortgage with Red Bank, you have a credit score of 620, you have 20 percent down, and your debt ratios are below 50. Or whatever your approval terms are. Competing loan officers will have the exact same loan program. They might call it something different, but it's still probably identical to the one you're being screwed on down the street.