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While this post is mostly my opinion, there are some relevant facts presented here which I have witnessed personally. I’m going to reveal these facts while trying to remain objective. This will difficult considering that most of the subprime industry has dabbled in deceptive and fraudulent predatory practices for years.

The title of this post is Subprime Mortgage Woes. It sounds like Subprime lenders are the victim, but it really means they finally got their comeuppance. The idea that the blame for the subprime mortgage disaster is to be placed squarely on the shoulders of the consumers is laughable. Most of the well known subprime mortgage companies are (or were) involved in a game of unfair and deceptive mortgage practices. By shear determination alone, subprime’s focus was placing homeowners in ARM loans with low introductory “teaser rates.”

My own personal experience, as well as that of others to whom I have spoke, was a bait and switch tactic. Bait unsuspecting homeowners in with low Fixed teaser rates and then at the closing, switch to an ARM.

This was the number one deceit tactic by most subprime lenders. Many homeowners didn’t realize they had signed papers for an ARM mortgage, because the only thing they had ever discussed with the loan officer was a Fixed rate mortgage, but just as many did notice the change.

Some of the mortgage companys’ loan officers illegally doctored loan papers (contracts) with Photoshop and changed documents from Fixed to ARM. By the time homeowners received the “doctored” documents by mail, the 3 right of rescission had expired and the homeowner was “stuck” in an illegally gained mortgage.

Why did mortgage companies push ARM loans? Loan officers made more in commissions if they closed an ARM loan from the perpetual money machine it created. The big name, well known mortgage companies literally demanded that their loan officers close nothing but ARM loans to keep homeowners coming in every two years to refi.

The loan officers, many of them trained to go through the loan documents as quickly as possible at closing, failed to disclose the terms to the homeowners and would simply state, “as discussed.” “As discussed” meant that the homeowner had discussed a Fixed Rate loan - nothing was ever discussed about an ARM. While I personally read the documents carefully at my closing, many homeowners trusted the mortgage company with whom they dealt. Gone are the days of trust between a consumer and a business. It is a “buyer beware” world we live in!

Let’s face it, many people trust a company that has brand name recognition with high profile advertising and have no reason to suspect that the company would stoop to unscrupulous and fraudulent business practices. Why would anyone suspect that a company that has won numerous awards for customer service or has their name on stadiums, arenas or ballparks, be committing fraud or using deceptive business practices? This type of brand recognition and advertising serves it’s purpose. It creates a false feeling of comfort and trust among consumers.

The main focus for the subprime market was “Get the ARM loan no matter what it takes!” An attitude that included lying to the homeowner and breaking several state and federal laws in the process while illegally”doctoring” documents to force the homeowner into an ARM loan. Subprime lenders had to know that at some point they were going to get caught. They also had to know that at some point they were going to end up with a negative cash flow which would create an economic disaster. They had to make up that cash flow somewhere and their so-called ingenuity came in the form of “keep’em coming back every two years” with ARM loans! Raising interest rates every six months would ease the cash flow problem, but they didn’t think this ingenious idea through to a logical conclusion.

Anyone who can only afford a $1,000 a month mortgage payment, can not afford to have their mortgage payment go up every six months. That is common sense logic and I can not understand why mortgage companies thought ARM loans were the answer to increasing their cash flow. It wasn’t. It backfired on the mortgage industry with a well deserved and well justified fury.

Homeowner Greed?

It infuriates me to read from any author of an article on the subprime debacle that he thinks homeowners were being greedy and that led to the current subprime failure. Let me see if I understand this right…

A homeowner is looking to refinance his high interest rate mortgage:

• in a market that has seen the lowest interest rates in a decade
• makes a financial sound and responsible decision to refi to a lower interest rate
• is specifically targeted (predator practices) by a subprime lender who knows he has less than perfect credit
• in some cases the homeowner’s credit was actually good, but the mortgage company checked the homeowner’s credit repeatedly to lower the credit rating; therefore, putting the homeowner in the subprime market
• gets an offer at 5.6% Fixed
• decides to refinance
• is deceived by the mortgage company’s loan officer by being convinced that he signed papers for a Fixed rate
• some of the fees he paid were illegal charge
• two years later he finds out that he signed an ARM loan and his interest rate is going to increase
• his home was over appraised
• he can refinance with the same mortgage company to no benefit and any equity he accumulated in the first two years will be charged back in fees with the refinance increasing the homeowner’s mortgage balance and subsequently, his debt.

How is that greed on the homeowners part? I don’t know about you, but I call that trying to do something considered very intelligent by the financial experts, refinancing a high rate mortgage to a lower rate. Where it went very wrong was putting faith in a supposedly reputable business by brand name recognition that in the end use deceit and broke state and federal laws just to get the loan which made billions for subprime lenders.

I know very few people who know everything there is to know about mortgage laws in order to keep from being deceived by unscrupulous mortgage companies and their employees. Could you imagine how much reading and information you would need to know about mortgage laws to consider yourself knowledgeable?

Most homeowners depend on mortgage companies, banks and loan officers to be honest and knowledgeable. Since the subprime debacle, I’ve talked to many people concerning their mortgages. These folks are not only intelligent, they are like most consumers, they depend on the mortgage company to know the laws and will be honest and fair where their mortgages are concerned. Since the subprime failure, none of these people trust banks, mortgage companies or loan officers. The trust between consumer and businessman stands on very shaky ground due to the subprime mortgage crisis making it justifiably necessary for consumers to be wary.

Financially, it is good sense to refinance to a lower rate. It is not greed! It is just good financial management - period! Calling it greed shows how little some people really understand the issues concerning subprime lending or maybe, they do not understand the mortgage process themselves. I find that when someone makes a comment about how refinancing is greed on the homeowners part, they themselves are usually not a homeowner.

Now, if homeowners were the ones who made $322 billion in 2003, I could see that this might be homeowner greed, but that is not the case, is it? Homeowners have not made one single, solitary penny from doing business with subprime lenders and that right there ends the argument for “Homeowner Greed.”

The key word, folks, is DECEPTION and that deception was created by subprime lenders, not homeowners. Many thousands of homeowners were deceived and I don’t know anyone who has not been deceived by a business at some point in their lives. It’s only after the fact that many consumers discover the deceit.

The Agony of ARM Mortgages

After the initial Fixed rate period (usually two years), ARM loans go up at an absurd rate of 1 to 3% every six months to a cap at 13/14%! Subprime lenders knew what they were doing. They set themselves up to make billions of dollars on finance fees and interest from the subsequent rise in ARM rates which are illegal for Home Equity loans in some states, but if you have millions…no, billions of dollars, you can donate to a congressman’s campaign fund and get the congress to change federal mortgage laws. This is exactly what one high profile mortgage company CEO and his wife did and other mortgage companies followed suit.

Subprime lenders were always one step ahead of the state laws. They knew that Federal law takes precedence over state laws, thus giving them the green light to do basically whatever they wanted. Subprime lenders were literally unfettered and unregulated.

In the beginning, they did whatever they wanted and got away with it until homeowners and financial analyst were seeing some disturbing trends in the subprime markets - a disturbing mortgage stock bubble and mainly, an alarming rise in foreclosures and not just in the subprime markets! That’s right! Foreclosures are up in the prime markets and it all revolves around ARM loans. While it is not as high as subprime, it is up well above average and the media hasn’t paid one bit of attention to it. Why? It goes back to placing blame on homeowners with poor credit, which is just an excuse to justify subprime lenders actions. It’s all a very sad state of affairs.

Subprime Lender’s Greed

The scheme behind ARM loans is MONEY! Lenders stand to make more money with ARM loans in the long run, but ARM loans are very stressful and extremely deadly to any homeowner. Good credit or bad, anyone who needs a mortgage is on a budget and needs a mortgage payment that is stable and affordable.

ARM loans payments are not easily calculated by homeowners and many homeowners want a fixed monthly mortgage payment. The consequences of subprime’s aggressive practice of intentionally putting homeowners in ARM loans are yet to be fully seen. The current consequences are that foreclosures are up over 5 times normal in some states and subprime lenders are losing money. They literally created their own nightmare.

Notice About Ripoffreport.com

At one time, I had recommended Ripoffreport.com, but since it has changed its format and I discovered that the owner has been taking payments from businesses to remove negative complaints, I will no longer recommend it. The owner has stooped to doing the very thing he accused the BBB of doing, taking money to report a “satisfactory” rating. He is being accused of and has been sued for conspiracy and racketeering as well as paying victims to falsify negative claims against businesses in an attempt to defame innocent businesses.

I am all for consumer advocacy, but I am against extortion at any price. I believe the burden of proof lies with the person making the complaint and believe that every business has the right to refute a complaint by providing proof of their innocence.
I became concerned when I noticed that Ripoffreport.com no longer allowed businesses who had negative, seriously damaging claims posted against them to state their rebuttals. Not only did this seem unfair, it seemed unconstitutional. It was as though Ripoffreport.com was taking a one-side slant to consumer advocacy without allowing a business to provide proof.

Ripoffreport.com was supposed to be something better than the BBB. A place where consumers could voice their complaints against businesses and the businesses were given the opportunity to rebuttal with proof or an offer to help the consumer. Lately, this has not been the case. I’m am sorry to see this happen. Consumers needed Ripoffreport.com as well as businesses. It should have been run much more fairly and with the best interest of everyone involved.

I did find a lot of information on several sites confirming that many businesses are fighting back by suing the owner, Ed Magedson, but rest assured, many of the complaints posted at Ripoffreport.com concerning deceptive business practices of mortgage companies were legitimate complaints and and the powers that be knew they were legit. It’s a shame that the owner had to resort to illegal tactics when there really was no need to go that far.

I posted a report at Ripoffreport.com concerning my mortgage company and was contacted by an attorney. What I didn’t realize was that my problems with my mortgage company had already been aired in court by means of several lawsuits from other homeowners, so my post was validated by well documented proof.

There is an excellent interview with Ed Magedson in a blog by Sarah Fenske with Phoenix New Times. It reveals the character of Ed Magedson and why he, like most consumers, felt compelled to something more aggressive, since most consumers find the law protects the businesses who usually have more money and power.

Burden of Proof

I will not name names and I certainly could, but just about every well known mortgage company has dabbled in deceptive and predatory business practices. Several have been sued and one in particular lost a very large class action to the tune of $325 million. It’s easy to find out who’s been bad. Do a Google or Yahoo search on “subprime deceptive business practices.”You’ll find ‘em on the Net and when you do, you’ll wonder why the Federal Government is putting up with their whine about, “We tried to help poor people with less than perfect credit by giving them loans and they stiffed us.” If they were truly honest about their behavior, they should have said, “We lured trusting homeowners in with teaser rates and stiffed them by fraudulently placing them in ARM loans, knowing full well that even someone with perfect credit could not stand the strain of interest rates increasing 1 to 3% every six months to cap at 13/14%.”

The Federal government should be more concerned with helping States discover what needs to be done to help homeowners who are victims of Subprime Lender’s deceptive practices. Homeowners are losing their homes due to the illegal nature of these practices; they are the victims, not subprime lenders. Subprime lenders are a victim of their own greed.

My Personal Experience with Subprime Lenders

It seems from the very beginning, I have been a victim of subprime lenders and didn’t even know what a subprime lender was or that each of these lender’s primary target was homeowners with less than perfect credit. My husband and I decided to take out a Home Equity loan on our home. It needed repair and needed it soon. Our credit was excellent.

The first mortgage company was good, but they changed the due date and literally screwed up our payment process. Our payment was due on the 20th of every month and when our due date was moved to the 1st, the mortgage company insisted we were 30 days past due. It took me six months to get this mess straightened out; meanwhile, they were acquired my another company and only then did the problem get better. It would take forever to explain all the problems with this fiasco. It’s safe to say it was a mess.

Second mortgage company was strange. We had excellent credit, yet the interest rate was 14%. We made our payments on-time, they repeated posted them late and reported us to the credit bureau as late. Seems this was a tactic to hold on to customers, since so many were refinancing with other mortgage companies to lower rates. Report your customer as paying late, ruin their credit and that way, they can’t leave. They also tried to talk us into refinancing to charge us 12% in fees, which, by this time, I knew was illegal. Needless to say, we didn’t refi. Decided it was time to leave these folks.

The third mortgage company was a real piece of work. If you lookup predator in the dictionary, you will find their logo. This refi started with a local bank. The bank offered me a fixed rate loan at 8.5%, but I received a constant over-flow of advertisements in the mail from another well known, highly advertised mortgage company, which I will call Noname Mortgage. I had seen their ads on TV and at the time, I had no idea that they were a subprime lender. I didn’t even know there was such a thing as a “subprime lender.” We decided to go with Noname Mortgage company since they offered us a lower interest rate than that of the bank.

I witnessed some of the strangest behavior for a professional mortgage company I had ever seen. After being approved, I was told my interest rate would be 5.9% Fixed, but this changed several times during the loan process. Each time it changed, I was convinced by the loan officer that it was for a legitimate reason. The deed was in my name only and must be in both my and my husband’s name - upped to 6.9%; other unforeseen paperwork - upped to 7.9%; previous lender delays (over 60 days) in disclosing the payoff - upped to 8.9% and since this loan process took so long, they had to pull another credit report and this pushed it up to 9.9%. When we finally made it to closing, the interest rate was 9.9%, but instead of being a fixed rate, it was an adjustable rate (ARM).

When I refused to sign the loan papers because the loan was supposed to be a fixed rate, the loan officer told me that since there had been so many unforeseen problems, the fixed rate would be 11.9%….BUT, the ARM was fixed at 9.9% for two years and at the end of the two year fixed period, I could refinance to a lower fixed rate. Since it had taken so long and we were well into the loan process, the interest rate was much lower than our current loan, so we decided to sign the papers. At this point, we honestly thought we were doing the right thing and were dealing with an ethical company.

Two years later we decide to refi before the interest rate started to go up on our ARM. We started the refied process with Noname Mortgage company. After checking our credit, they told us the interest rate would be 7.9% FIXED! The loan process went smoothly this time, except for the closing…yeah, you guessed it!

We get to the closing and it’s an ARM, not Fixed! I never even discussed an ARM with the loan officer. The only thing we had discussed was a Fixed Rate Mortgage! I told the closer I refused to sign. She called the loan officer and he was mad. In a very angry voice, he ask, “What’s the problem?” I told him I do not want an ARM, we had never discussed an ARM and I refuse to sign. He tells me that their interest rates have increased and he knew I wanted the 7.9%, so now, the only way we can have that interest rate is with an ARM. Again, he tells me that we can refi in two years and get a lower rate.

Something was very rotten in Denmark…uh, sorry, the subprime market. This seems to be the customary “scheme” by Noname Mortgage company. Instead of backing out of the loan and starting all over with another lender, my husband and I decide to go ahead and sign the loan papers and we agree that when two years is up, before the rate starts to increase, we will refi with another mortgage company.

When the two year Fixed rate period goes by, we decide it’s time to refi and get as far away from Noname Mortgage as we can. We go to another mortgage company, I’ll call them Newlender Mortgage. During the loan process, I get a call from the loan officer that literally makes me feel like I am going to pass out.

The appraiser cannot appraise our home at the loan amount needed to payoff Noname Mortgage and cover the Newlender Mortgage’s fees. I call the appraiser. After talking with him for over an hour, I get an eye-opening education on the fraudulent behavior of certain subprime lenders, mainly in over appraising homes just so the lender can get the loan. My home was over appraised by $20,000 by Noname Mortgage.

I called an attorney in my state and to my horror, he tells me, “Well, they did give you a loan.” What was that supposed to mean? Yes, they gave me a loan, but did so in a very deceptive and fraudulent manner. Noname Mortgage has had its fair share of problems, mostly legal. They are no longer allowed to do business in most states.

Let’s look at subprime’s so-called woes:

First, subprime lenders put together an ad campaign to intentionally draw the attention of consumers with less than perfect credit. That was their target audience, that is what they wanted and that is what they got…along with billions of dollars in profits. This type of targeting is known as predatory practices. Many subprime lenders targeted the elderly as well.

Second, subprime lenders played some very deceptive games with consumers.

• Bait and switch interest rates. Started with a low teaser rate and increased the rate during the loan process for whatever reason.
• Repeatedly checking the homeowner’s credit in order to lower his/her credit rating to qualify for the subprime market.
• Over appraising homes just to do anything to get the loan in order to make money from fees and future rate increases.
• Charging prepayment penalties for early payoff, even though the contract says there will be no penalty for early payoff.
• Refinancing with no benefit to the homeowner. The homeowner ends up with more debt against their home due to high fees.
• Bait and switch rate terms. Promising Fixed Rate Mortgage (FRM), then changing the terms to an ARM at the closing. Many unsuspecting consumers signed their loan papers thinking they were getting a FRM, only to find out two years later that they had actually agreed to an ARM.
• Loan officers convinced homeowners to sign papers for ARM loans with the plan in mind of getting homeowners back to refi every two years with no benefit to the homeowner. Subprime lenders were creating a perpetual “money machine” that increased debt against the homeowner’s property with an eventual ARM rate increase ever six months.
• Charging outrageous and unnecessary closing fees, most of which were illegal.
• Purposely failing to post payments and reporting late payments to the credit bureaus in order to keep current customers from going to other lenders with lower interest rates.
• Breaking State and Federal mortgage laws.

The list goes on and on. All of it unfair, deceptive and in some cases illegal to consumers and all of it benefiting the mortgage companies involved in using these practices.

Third, subprime lenders made 332 billion dollars from unsuspecting consumers in 2003. Unsuspecting consumers made nothing, zip, zero, zilch, but they did have the heartbreak experience of foreclosure.

Fourth, the collapse came when consumers could no longer afford their mortgage payments due to rising ARM rates, which is now overflowing into prime lenders. Homeowners could not continue to refi every two years to avoid the nightmare of an ARM. Refinancing every two years forever is impossible. Homeowner’s would have more debt stacked on their homes with each refi and never pay off a mortgage with this perpetual cycle of refinancing to avoid the outrageous terms of an ARM which only benefited the mortgage companies.

At some point, the homeowner will be unable to take anymore money out of the equity in their home. Home prices would have to appreciate at least 20% a year to keep up with the refi fees and to comply with Home Equity laws in most states. On an average, most homes appreciate 5 to 7% a year. Subprime lenders knew this and took advantage of homeowners faith in a business they thought they could trust.

What they failed to realize is that everyone, including folks with excellent credit, are on a budget and know how much they can afford. The promise by subprime lenders to homeowners of refinancing before the Fixed period of an ARM expires was just another ploy to make billions in fees.

Fifth, I have talked to two neighbors who have perfect credit and mortgages with prime lenders. When they refied, the prime lender tried to talk them into an ARM. Has greed spilled over into prime lenders? Are they setting themselves up for prime lender woes? Have they learned nothing from the subprime fiasco?

Sixth, foreclosures in some states are five to six times the norm and going up! I find it hard to believe that that many people would sacrifice their homes to foreclosure simply because they have poor morals concerning paying their debt. This many foreclosures tells me one thing, subprime lenders intentionally and unethically put consumers in ARMs to make billions in fees and from interest when rates started to increase.

These companies are only now feeling the backlash of their behavior. They are also not taking responsibility for their behavior by blaming homeowners lack of credit morals for the problem. They targeted people with less than perfect credit and then talked them in to ARMs with absurd rate increases knowing perfectly well that very few people could afford the terms and conditions under an ARM! This degree of deception is not only unbelievable, it is scary. How does a homeowner know who to trust?

Seventh, ARM loans in today’s market are deadly! In the past, there were variable rate loans (VRM). The most a homeowner could expect their payment to increase $25 to $50 once a year. ARMs are ludicrous! ARMs increase every six months at a rate of 1 to 3% of the balance of the mortgage to cap out at 14%.

Based on the balance of the mortgage, the payment could increase $150 to $800 every six months! Many state constitutions and laws do not allow for VRM or ARMs for Home Equities to protect homeowners from foreclosure due to these types of loans, but Federal laws overrides state laws and it seems the Federal government does not see a problem with ARMs. With the recent state of events with subprime lenders and investigations into why there are so many foreclosures, this may soon change.

Eighth, the subprime lending problems will effect the home building industry which subsequently will affect the economy.

Educate Yourself!

When it comes to a mortgage, know everything you can about mortgages and the laws that govern lenders before you start the loan process. Investigate the company you intend to do business with thoroughly. Do a Google search on the company’s name. If you find any complaints, ask the loan officer about the complaints. Listen to your “gut feelings” and if you feel something is not right, look for another mortgage company.

The best book I have found is a quick read called What Mortgage Brokers Don’t Want You to know! by Mortgage Advocate Dan. Fixed rate Mortgage are the best, so do not allow your loan officers to convince you otherwise. ARMs are not in your best interest, especially where Home Equity loans are concerned. ARMs only benefit the mortgage company. They will make money from you in one of two ways: (1) raising your interest rate 1 to 3% every six months or (2) they keep you coming back at the end of the fixed rate period to refinance to make money from fees.

Everyday, I find another company that has found a way to charge hidden fees, have double means (say one thing, but mean another) contracts with open-end disclaimers (We reserve the right to change our fees without notice.), open-end contracts (this is known as perpetual debt or death by fee) and deceive consumers with deceptive business practices. It is truly a “Buyer beware!” world we live in. Gone are the days of blind trust. Every consumer needs to have their eyes wide open and be well informed.

Be well prepared when dealing with Mortgage companies and Mortgage Brokers. It could save you from facing foreclosure!

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