Another example of predatory practice is attaching a balloon payment to the loan. Balloon payments are typically seen in prime paperwork used when the borrower is upwardly mobile in their profession. Meaning simply, they will be making more money in the future and able to pay a large compounded payment years from origination. A balloon payment helps maximize the amount borrowed for a higher end property.
Another practice made by these lenders is to put the borrower under distress or fear of non-approval if they sop around but also to present different facts during the home-buying process and then show up at the Closing with different paperwork than discussed prior. Smith argues, "in a study of 255 very high-cost loans in Dayton, Ohio, 75% were found to have prepayment penalties and 24% had balloon payments" (4). To further suspicion, more than twice as many borrowers of these loans were acquired through mortgage brokers and were encouraged to refinance numerous times within in the first two years of the loan. Unfortunately a lot of this behavior confuses the borrower and leaves them not only dissatisfied but also uneducated. A predatory lender will use one of these practices and others as well when approving a loan to just the loan and make a dollar. This is wrong and as a result, many people end up with loans they cannot afford or pay back. This leads to foreclosure and losses for all parties involved.
Foreclosure
Countrywide Home Loan's FBRM Training Manual describes foreclosure as "a legal procedure in which a mortgaged property is sold to pay the outstanding debt in case of default" (11). Briefly, there are two types of foreclosure processes: judicial and non-judicial. Judicial is a longer process because it goes through the court system. How a foreclosure gets this distinction has to do with the state in which the property is located. The amount of time the process takes also varies from state to state depending on this distinction. For example, many states on the East Coast such as New York, New Jersey and Pennsylvania are judicial states and the process can take anywhere from six months to a year (Countrywide FBRM 12) while states in the West like Texas and California are non-judicial states where the process can take one to three months to finalize. This type of action on the part of the lender can be very scary and intimidating for the borrower. Foreclosure not only result in the borrower losing their home but can also have long-lasting and far-reaching consequences for them financially but also for the economy at larger. Foreclosure also serves as a loss for the lender should the property not be sold at auction. The property then becomes Real Estate Owned by the lender (Countrywide FBRM 37). This puts the responsibility of maintaining and improving the property for independent sale on the shoulders of the lender. This incurs further costs for them that will not be recouped upon sale of the property because the lender can only ask a fair market value. Generally, a lot of times, the property has been abandoned by the borrower or is damaged by the borrower and those repairs must be made. Foreclosure should be avoided at all costs as it is a terrible experience.
Statistics and Data
The reason behind President Bush's call for the Homeownership Challenge is not only to break down barriers but also to change how home loans are approved in this country. He believes by revamping the process will curb predatory lending because borrowers will be educated and informed. By knocking down barriers to homeownership, one being blemished credit will change how lenders view potential customers and the President thinks will allow an underserved population to finally have a presence in this market (America's Home Ownership Challenge, par. 3-4). The current administration stands by the notion that homeownership is a fundamental American right. It is good for communities because homeowners "work to maintain the value of their investment, which translates into a greater concern for neighborhoods. When citizens become homeowners, they become stakeholders as well. By increasing the ranks of stakeholders, communities not only enjoy increased stability but also benefit from a new spirit of revitalization" (Background, par. 4). Then how does one explain the disparity of minority homeowners when compared with that of white homeowner? Clearly, the white population of the country has the means for barriers not to be an issue when it comes to home purchase. They also do not suffer the same economic burden that will be explored below. Still recent years due to the factors of new home loan products and low interest rates have stimulated the minority segment. "Homeownership has in fact increased, Hispanics and African-Americans still lag behind the homeownership rate of non-Hispanic whites by more than 25 percentage points, and Asian-Americans by more than 20 percentage points. Table 1 illustrates this fact.
Homeownership Rates:
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