Beware getting victimized
by high-pressure
home equity loans
by Robert K. Heady
Bank Rate Monitor
It started out innocently enough. A construction company salesman knocked on the door of an elderly couple in Brooklyn, N.Y., and said, "Hey, folks, you need some new windows.""Don't have the money," replied the couple. "No problem," said the sales guy. "You can pay for them at $43 a month over 15 years."Not bad, they thought. The mortgage on their old house was only $10,800 and the monthly payment was $235Social Security more than covered it.A few days later, the salesman, Jimmy, came back and told the old folks that for a few extra dollars a month he could also renovate their kitchen and bathroom. The couple signed the papers, but Jimmy flashed them so fast they really didn't have time to read them. What they had contracted for was a new $75,039 first mortgage on their home at a rate of 17 percent, monthly payments of $1,156, closing costs including $6,500 in points, and $3,538 for a credit life insurance policy.But hold on. There's more to this horror story about how predatory lenders prey on "cash-poor, equity-rich" seniors.The desperate couple told the lender they couldn't possibly come up with the monthly payments, but were too embarrassed to tell anyone they'd been victimized by a home improvement scam. The lender said it could refinance the new mortgage to get them more money, to which the couple agreed. The new mortgage amount was $87,972, payments were $1,237 ($81 more than the first mortgage), points were $7,500 and credit life insurance jumped to $5,472.After five years the couple had paid almost $68,000 by scrimping and doing odd jobs in the neighborhood. Five months later they were served with foreclosure papers. They became so frightened of losing their home that they stopped opening their mail. Only because a daughter got wind of the problem and rounded up an attorney was the foreclosure action stopped."Most subprime lenders operate ethically," said Sen. Chuck Grassley, R-Iowa, chairman of the Senate Special Committee on Aging, which recently held a hearing on home equity loans targeted to seniors. "However, the bad apples spoil the whole bushel. Some lenders take advantage of unsuspecting seniors and draw them into expensive loans that can cost these well-meaning folks their homes," Grassley said. His committee heard testimony by the couple's daughter.The word "subprime" in this instance refers to charging consumers much-higher-than-average rates because they are credit risks. Plus, some seniors aren't sophisticated enough to see beyond the tricks of door-to-door selling, or the fine print in a contract that traps them into virtual slavery.What Grassley's committee is trying to do is "weed out the bad actors" in the business. He's asked the Federal Bureau of Investigation and the Federal Trade Commission to clamp down on illegal and deceptive home equity practices. Lately, this type of loan has been going through the roof as more consumers consolidate credit cards and other debt at a lower rate by borrowing against their single biggest assettheir house.Beware of these practices if a lender tempts you with a home equity deal, says the FTC: