People with shaky credit histories who've paid dearly for a home mortgage often wind up in Laura Alridge's office.
Alridge, an attorney with Richmond-based Boleman Law Firm, helps them file for Chapter 13 bankruptcy protection so they can reorganize their finances and prevent foreclosure.
"A lot of times these people have bought too much house and gone to a third-tier lender, which means they've gotten a subprime loan," she said.
These increasingly popular loans come at a higher interest rate than those offered to applicants whose credit records qualify them for prime-rate loans. Some include additional terms, such as penalties for prepayment if the loan is refinanced and balloon payments, which increase the risk of foreclosure.
"These predatory lending schemes make it sound so wonderful, but they really don't explain what's in the loan document," said Alridge. "There's so much emotion wrapped up in buying a home that when people sign the mortgage papers, they don't read them as well as they should. They're just so excited to get the key to their new home."
Her clients would have done better if they'd shopped around before signing on the dotted line, she said. Many subprime lenders can help people with poor credit get a good home loan.
The National Home Equity Mortgage Association, which represents the subprime lending industry, did not return calls seeking comment about these loans.
Homeowners in predominantly minority neighborhoods are 35 percent more likely to have been charged prepayment penalties on subprime loans than those in mostly white neighborhoods, according to a new study by the Center for Responsible Lending at UNC-Chapel Hill.
This puts them at a substantially greater risk of losing their house--along with any equity they've built up, said Michael A. Stegman, one of the study's authors and director of UNC's Center for Community Capitalism.
In the last three months of 2003, more than 2 percent of all subprime loans nationwide entered foreclosure. That's 10 times the rate for all prime loans, according to the study.
And those foreclosure filings add up over time. More than 20 percent of all first-lien subprime refinance loans that originated in 1999 had entered foreclosure by 2003, the study found.
Predatory lending is draining homeowner equity and increasing foreclosures and home losses, especially in minority communities, just at the time that national housing policy is attempting to close the minority homeownership gap, Stegman said.
Boleman Law Firm started getting so many foreclosure and bankruptcy cases--roughly 2,000 in 2004 alone--that it opened a satellite office in Fredericksburg 18 months ago. Much of its work is with minorities who have taken out subprime loans.
"If you look at the majority of people who file for bankruptcy, the overwhelming majority are single mothers of color," Alridge said. "It really comes down to a lack of money savvy. As a nation, we've done a terrible job of teaching people about money and interest and how it works."
Key things that people should look out for when applying for a subprime loan are prepayment penalties and balloon payments. Both increase the chance of foreclosure, the Center for Responsible Lending's study found.
Prepayment penalties, which are applied if a mortgage is paid off before the due date, can make it expensive for people to renegotiate their mortgage if they want to take advantage of improving credit and declining interest rates.
The study found that subprime loans with prepayment penalties in the first three or more years of the loan are 20 percent more likely to go into foreclosure than those without prepayment penalties. The risk level dips slightly for loans with penalty terms of less than three years.
Balloon payments require borrowers to pay a single lump-sum payment many times greater than their regular payment at the end of the loan term. Borrowers with this type of loan face 46 percent greater odds of entering foreclosure than those whose loans did not have one, the study found.
One of Alridge's clients got a second mortgage with a balloon because she could afford the monthly bill. What she didn't realize was that she'd have to come up with a $10,000 payment in four or five years.
"She only makes $1,800 a month," Alridge said.
Subprime loans with adjustable rates also can be problematic because many people don't factor in an increase when they're looking at how much they can afford to pay each month. Borrowers with this type of loan face 49 percent greater odds of entering foreclosure than borrowers with fixed-rate subprime mortgages, the study said.
Alridge's advice to people who are interested in buying a home despite a poor credit history is to start saving for a down payment and educate themselves about what's involved in both a mortgage and home ownership.
"Owning a home is often more expensive than renting," she said. "Your utilities tend to be higher and if your refrigerator quits, you can't just call your landlord and say, 'Come take care of it.'"
To reach CATHY JETT: 540/374-5407 cjett@freelancestar.com