- The Washington Times - Monday, July 10, 2000

Ella R. Johnson lives in a quiet suburban neighborhood in Southeast Washington, in a home adorned with silk flowers and pictures of grandchildren and foster children. She may not be there much longer.

On June 16, marshals arrived with an eviction order to remove Mrs. Johnson, 76, and her 101-year-old mother from the house they purchased together nearly 10 years ago.

Mrs. Johnson said the marshals were stopped by the sight of her mother, Susie R. Brown, who will turn 102 later this month. They said they would need an ambulance to remove Mrs. Brown from the house, and that they would return in a few days.

The women's troubles began when Mrs. Johnson became ill a few years ago and fell behind on her mortgage payments because of medical bills. In 1996, she decided to take out a loan to catch up with payments.

Three years later, another lender, who had purchased the loan, foreclosed on her house. Mrs. Johnson claims she was the victim of so-called "predatory lending" practices by mortgage lenders, and stories like hers have inspired a movement to quell such abuses.

Critics say unscrupulous lenders target elderly members of minority groups, frequently women, with deceptive tactics. Though the problem is not new, rising public concern has prompted federal and local governments to consider a crackdown.

The departments of Housing and Urban Development and Treasury issued a report June 20 defining abusive lending practices and proposing regulatory and legislative remedies.

Consumer advocates cheered the proposals, as well as efforts by states, other regulatory agencies and members of Congress to take aim at predatory lending.

"Almost every part of the lending process can be manip-ulated into predatory behavior if the participants so choose," said Roy Green, legislative repre-sentative for housing and financial services at AARP, the over-50 advocacy group.

The HUD/Treasury report highlighted several tactics as "predatory," including:

• flipping when lenders convince borrowers to frequently refinance their mortgages, charging high interest and fees;

• balloon payments low monthly payments that balloon at the end of the loan;

• deception of national credit bureaus about borrowers' credit history to justify high rates.

Abusive loans are confined to the subprime, or high-interest, loan market. But not all subprime loans are abusive they do provide opportunities for borrow-ers who cannot get loans from conventional lenders.

Subprime loan originations rose to $160 billion in 1999 from $35 billion in 1994. Total ori-ginations in 1999 amounted to $1.275 trillion.

But predatory loans are difficult to measure, since their definition is fluid and they are not clearly visible from examining balance sheets.

The amount of abusive loans is "anybody's guess really," said John Bancroft, managing editor of Inside Mortgage Finance in Bethesda, the source of the subprime figures.

Perfect target

Mrs. Johnson fits the typical profile of an abusive lending target, according to consumer advocates. She is elderly, black and female.

"I can't emphasize enough that this is a civil rights issue," said William J. Brennan, director of the Atlanta Legal Aid Home Defense Project, at a recent predatory lending forum at the Library of Congress.

Mrs. Johnson bought her house with Mrs. Brown for $167,000 in 1991, after her brother, who had been caring for her mother, passed away.

She was a government office worker and a foster mother, but has given up all work except a baby-sitting job to devote her attention to her mother, whom she cares for with the help of an aide.

"I try to do all I can, but it's really got me," she said during a recent interview at her home. "It's not easy, baby, it's hard."

A few years ago, Mrs. Johnson had fluctuating blood pressure that drove up her medical bills, and she had trouble paying her mortgage each month.

"I didn't know which way to turn," she said.

On the advice of friends, she decided to refinance her mortgage and borrow against the equity in her home to get money to pay off debt.

Mrs. Johnson understood from a mortgage broker that she would receive a lump sum of $10,000 to pay off her debts, and that the new lender would refinance her mortgage.

Instead, she said she received less than $500, though the bank did settle her back mortgage payments.

Jim Sugarman, an attorney with Legal Counsel for the Elderly who is investigating Mrs. Johnson's situation, said brokers and lenders frequently miscommunicate about the terms of the loan.

"These brokers will say anything to people to get them to take out a loan," he said.

And predatory lenders do not care whether borrowers can pay regularly because they plan to sell the loan, he said.

Mr. Sugarman said Mrs. Johnson's refinanced mortgage had an adjustable rate a term she said she didn't understand. The interest rate was based on the London Inter-Bank Offered Rate, or LIBOR, which rises consistently.

Mrs. Johnson's rate was the LIBOR plus 8.75 percent. That would mean that if she still held the mortgage, she would be paying over 14 percent, Mr. Sugarman said.

After Mrs. Johnson's refinancing, her $664-per-month mortgage payments rose to over $1,100, then to over $1,300. She and her mother have a combined income of about $1,600 a month.

As she continued to fall behind on payments, the company that now owns her mortgage, Aames Capital Corp., foreclosed and marshals came knocking. Mrs. Johnson was frantic. She called the mayor's office, which referred her to AARP's Legal Counsel for the Elderly.

"I wasn't the only one that was in that predicament," she discovered after speaking to Mr. Sugarman, she said.

Since Aames owns Mrs. Johnson's house, the marshals could return at any time. Mr. Sugarman said he is trying to determine what legal recourse, if any, she has to keep her home.

At the June 28 predatory lending forum, Mr. Sugarman said he had 30 to 40 clients with similar stories.

Anti-predatory proposals

The HUD/Treasury report suggested that Congress enact several laws banning certain practices in the subprime market and called for increased consumer disclosure.

The report said creditors should supply potential borrowers with a list of HUD-certified credit counselors in their area.

That proposal might have benefited Brad Williams. Mr. Williams, 63, repeatedly refinanced his home to get cash to pay off debt.

He said lenders never fully explained paperwork to him and he signed documents after he received his loan.

With the help of AARP, Mr. Williams filed suit against First Government Mortgage and Investors Co., a frequent defendant in complaints filed by AARP clients. He won an initial judgment of $25,000, and the case has been appealed.

Mr. Williams, a retired painter who lives in Northeast, got used law books and asked neighbors to help him read them to better understand his case, since he is only partially literate. He also combs through the books for information to help him exonerate his son, in prison for murder in North Carolina.

Like Mrs. Johnson, Mr. Williams said the lender promised him $10,000, which he never saw. Another defendant in the case, Central Money, provided him a one-year balloon loan with an 18 percent interest rate, according to the complaint.

Mr. Williams' proposal for coming down on such lenders is clear: "Treat them like drug dealers, take everything they've got," he said.

Government agencies such as the Federal Trade Commission can impose monetary penalties against unscrupulous lenders, but critics say they have not been active enough.

"There's a lot of authority that the financial regulatory institutions could exercise more effectively, and there we would like to see some action," said Mr. Green of AARP.

The HUD/Treasury report does address that issue, calling for increased funding to state, local and private agencies that combat predatory lending.

A portion of subprime borrowers are protected by the Home Ownership and Equity Protection Act, or HOEPA, and the report calls for an expansion of those covered.

The report also calls for a ban on flipping refinancing any HOEPA loan within 18 months of the preceding loan's origination "unless the new loan provides the borrower with a tangible net benefit, as defined by the Federal Reserve Board."

Jean Constantine-Davis, a senior staff attorney at AARP and Mr. Williams' lawyer, said the report is promising.

"You need an attack on many levels" legislative, regulatory and judicial, she said.

Critics of the report have said predatory lending is merely this year's political darling issue, but David Jeffers, vice president of corporate relations at Fannie Mae, said the problem is real.

"The problem is so pervasive that it's going to require an across-the-board effort by lenders, by Fannie Mae and Freddie Mac, by regulators," he said.

Fannie Mae is a government-sponsored entity and the nation's largest provider of mortgage funding.

"As many as half of the people now being served by the subprime market could actually qualify for a lower-cost Fannie Mae conventional loan," Mr. Jeffers said.

John Taylor, president and chief executive officer of the D.C.-based National Community Reinvestment Coalition, said one solution to the abusive lending issue is to rely on banks.

Banks not nonbank lenders must stay in the market to improve legitimate choices for high-risk borrowers, he said.

"Banks are underserved neighborhoods' best hope," he said. When banks leave such markets, "they leave it to less regulated, less scrupulous lenders."

Lender defenders

Some analysts say the subprime market is not as profitable as consumer advocates make it out to be in fact, large lenders are exiting the market.

For example, First Union Corp. recently declared it was selling off all of its subprime mortgage operations, including the Money Store, which it had purchased just two years before.

Lawrence Cohn, director of Research at Ryan Beck & Co. in New Jersey, said the subprime market's profit margin is not clear.

Subprime borrowers who make prompt and full monthly payments see their credit improve and can switch to a better loan, taking their business out of the subprime market.

On the other end, there have been a higher number of defaults on subprime loans than anticipated, Mr. Cohn said.

Subprime lenders have tended to securitize their assets, said one asset-backed securities analyst who declined to be identified.

That means lenders package a group of loans together and sell them on the bond market for an immediate gain on their balance sheet and quick cash instead of the slow month-over-month trickle that typically comes from loan payments.

But companies got too aggressive with documentation and pricing in order to aggregate more loans, the analyst said. They started accepting higher-risk customers, and the tactic drove about a half-dozen subprime lenders out of the market in the past couple of years.

"This industry's been steadily losing money for two years in a row," said David Olson, president of Wholesale Access, a Columbia, Md., mortgage industry research firm.

Mr. Olson believes the predatory lending problem is actually very small "minuscule," he said.

"Millions of loans are made. In any market, you're going to find someone who's unhappy with what happened to them, it's just the nature of markets," he said.

One attorney who has represented defendants in predatory lending cases said that the problem does occur but he claims there are also those who work the system.

Elderly borrowers complain mortgage payments are unduly taxing because they are on fixed income. But some seniors, the attorney said, do not reveal they have income from part-time jobs, or co-own their homes with a family breadwinner.

At home

Ella Johnson waits.

She wakes up early and goes to bed early every day, tired from caring for her mother and in a constant state of anxiety about the eviction notice hanging over her head.

She tells her mother she may have to put her in a nursing home if they are thrown out of the house.

"I just couldn't keep it all up," she says of her mortgage payments.

"I never did catch up."

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