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Created on Friday, 20 January 2012 06:10

Predatory Loans; The Borrower Is The Prey

Amongst the many factors that have been identified to have contributed negatively in the housing and mortgage downfall is the practice of predatory lending by mortgage providers.

When the housing and mortgage sectors of the US economy were experiencing very good fortunes, these two sectors of the economy were the most profitable sectors to invest ones money.

Investors loaned out their monies to mortgage providers so that they could benefit from good returns made possible by the high interest rate that existed at the time.

Borrowers also used huge home loans to acquire property that would fetch them a lot of money when they eventually decided to sell such property.

Mortgage providers were also beneficiaries of the good fortunes that existed in the housing market. They earned a lot of money by way of interest on home loans, closing costs charges and other fees. But in a bid to unduly gain more from borrowers, some mortgage providers engaged in what has come to be known as Predatory Lending.

So what at all is Predatory Lending? Has it got anything to do with a predator hunting its prey? Certainly, predatory lending is a practice amongst mortgage providers where home loans are offered to very high risk borrowers who stand a high chance of defaulting when it comes to repaying the loan.

If mortgage default has a negative effect on the borrower, the mortgage sector and the economy of the country as a whole, then why would mortgage providers initiate predatory loans?

Some of the mortgage providers in this country set off by targeting borrowers whose credit scores are not high enough to support a conventional loan application.

Some even went as far as enticing senior citizens in the country; most of whom do not have enough financial power to support a mortgage payment plan. Since these people do not fully meet the criteria for obtaining home loans, they are ineligible for home loans under most mortgage schemes in the country.

Such people are more susceptible to accept the high terms set by these predator mortgage companies. For this reason, high risk borrowers are offered home loans at very high mortgage interest rates.

This is to make up for the risk the mortgage company is taking by agreeing to grant the home loan. The next thing such borrowers have to contend with is the high charges and fess that are associated with completing loans from these companies.

All this while, the mortgage company that is initiating these high risk loans, through assessment of the financial conditions of these borrowers, is very sure that the loans would go into default.

After completing the terms of the mortgage loan, the mortgage providers would package the loans and sell them out to other mortgage companies or lenders without revealing the true state of the mortgages to the investors.

Again, these mortgage providers are able to acquire large sums of money from lenders and investors by simply selling out bad mortgages to them. So far, you would realize that predatory loans are reaping benefits for only the mortgage provider.

To the borrower, it may seem like a better way of obtaining a mortgage for the acquisition of a home until high monthly payments begin to influence their finances.

The borrower will subsequently go into default, a condition the mortgage provider knew would happen even before the loan was granted, and the mortgage provider would add insult to injury by slapping high charges on the late payments.

The end result is that, due to one company’s greed, the entire housing market falls flat on its tummy.