Desperate for business in a collapsing industry, a growing number of mortgage brokers are resorting to deceptive practices and violating federal do-not-call restrictions to sell an exotic product one industry leader called “dangerous” for most borrowers.
Through telemarketing blitzes, blanket faxes, direct-mail and radio ad campaigns, unscrupulous brokers are hawking misnamed “1 percent mortgages” –- also known as “negative-amortization” loans -– in misleading and potentially fraudulent ways, said Kate Crawford, consumer-protection chairwoman for the National Mortgage Brokers Association. The onslaught is especially severe in fast-cooling, major metro markets.
“I would never recommend these, especially for a first-time home buyer,” Crawford said. “They’re very dangerous, and most borrowers don’t understand how they work even after you explain it several times.”
“No one should be pushing negative-amortization mortgages ever,” said Will Ogburn, executive director of the National Consumer Law Center in Boston. “And to do it deceptively by highlighting a 1 percent interest rate is a huge scam.”
Desperate measures
The U.S. mortgage industry is undergoing its swiftest contraction in history this year since rates jumped from 50-year lows, sparking an unprecedented drop in refinancing and new-home purchases. Federal authorities estimate the number of Americans employed in the mortgage-origination field will drop 40 percent in 2006.
As a result, some brokers are aggressively marketing once rare “neg-am” loans, previously reserved for wealthy borrowers who receive income in big spurts. They came into widespread use last year in high-priced markets like San Francisco for borrowers unable to qualify for conventional mortgages.
Under a common “four-pay option,” borrowers can elect to make a monthly payment based on a 15-year or 30-year fixed-rate schedule. They also can pay only the monthly interest and none of the principal, or even just a small percentage of the interest due. That last choice, which many take, results in negative amortization where their balance steadily grows each month -- an especially risky choice in a slumping housing market like the one now under way.
A radio ad in greater Washington, D.C., last month trumpeted a “1.25 percent mortgage” that enabled homeowners to borrow “$500,000 for as little as $1,300 a month” -- without disclosing how deeply and quickly into debt they’ll go if they do -– about $1,400 a month or nearly $17,000 in a year. The fast-spoken disclosure language said only that “this loan could add to your principal balance.”
Lax enforcement
Anyone who advertises neg-am loans as 1 percent mortgages -- rather than loans with 1 percent payments -- could be prosecuted for fraud, experts say. Yet, no federal or state authorities have stepped up to prosecute abusers.
Industry leaders and consumer groups are united in their denunciation of these mortgages. They liken them to 125 percent mortgages that do little more than enable overextended borrowers.
Just how pervasive the predatory come-ons have become is difficult to gauge. The Federal Trade Commission and the Federal Communications Commission declined to acknowledge receiving any “1 percent mortgage” complaints or make the type of recent complaints public –- even though no individual companies would be named.
Do-not-call violators realize they face little repercussion given scant enforcement. In the year after the registry took effect in October 2003, during the height of publicity, the FCC issued fines or citations to 20 companies. In nearly two years since, it’s cited only six, according to the agency’s Web site.
Barraged by calls
One California homeowner on the DNC list received two unsolicited calls in a 12-hour period this month from brokers from Blue Leaf Financial and United Century Mortgage, offering a “lower cost” or “wholesale” loan. That same homeowner fielded more than five dozen such calls -– none of which show up on caller-ID or are traceable by “*69” -- in the last two months.
James Yoo, listed as head of Chatsworth, Calif.-based Blue Leaf in California Department of Real Estate records, did not return a phone call for comment. A Google search yields a dormant home page for a company called Blue Leaf Financial at a more upscale street address on Wilshire Boulevard in Los Angeles.
James Drake, customer service director for Santa Monica-based United Century, said the offending call was one of the “0.5 percent” that slip through its scrubbing process for DNC registrants. “I personally extend my apologies. I don’t know of any company with a 100 percent perfect rate on the DNC.”
As for pitches for 1 percent neg-am mortgages, Drake agrees they can be “bent to the point where some people don’t know their loan balance is rising, and that is absolutely heinous.”
Those most at risk
Michael Pfiefer, general counsel for the California Mortgage Bankers Association, is certain there’s been widespread violations of false advertising and do-not-call laws because he’s received numerous calls at his own home.
“People are trying to figure out ways to stay in business” and some are resorting to potentially criminal means to do it, Pfiefer said.
The danger of these unchecked abuses is especially grave for mortgage holders with minimal equity in their homes, Crawford warned.
“Human nature is to make the minimum payment, and when they to go sell their house, they may have no equity left,” Crawford said, especially if their home’s value drops. “They may have to stay in that house longer than they planned, and that will turn their world upside down.”
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