PREDATORY LENDERS STEAL EQUITY FROM NJ HOMEOWNERS
by Marvin Wolf, Esq.

The radio and television ads sound friendly and inviting. “Need extra money? No Credit? No Job? No Problem! Free up that trapped home equity! Consolidate your debt! Get a credit card at a lower interest rate! Refinance now and walk away with cash! We will qualify you in twenty minutes over the phone!" However, many New Jersey homeowners don’t realize that if they sign these contracts, they are trading in short-term cash flow problems for long-term problems that could result in the loss of their homes.

According to the National Consumer Law Center, no form of credit has grown faster than home equity lending. Home equity lending goes by various names – second mortgages, wrap-around mortgages, home-secured credit cards, home-equity lines of credit, mechanics liens, and home improvement contracts. As a result of aggressive marketing, consumer debt in New Jersey is increasing at an alarming rate. Many local homeowners have been tricked into thinking of their homes as substitutes for ATM’s and have discovered too late that they have put their homes at risk of foreclosure by accepting these “easy money” deals.

Essex County homeowners are prime targets for predatory lending schemes. Predatory lenders actively market to homeowners in New Jersey and trick them into taking out loans against their homes that the lenders know the homeowners cannot possibly afford to repay. These loans give the illusion of being affordable because they start out with low affordable monthly payments. However, in a few years the loan payments become impossible to repay because of interest rate changes or property tax increases. These loans often contain confusing terms (i.e., “balloon” payments) and hidden charges. Even a small increase in interest rates over the next five years could turn an Essex County homeowner’s current $1,250 monthly payment into a $2,100 monthly payment. Despite these dangers, a recent New York Times article revealed that homeowners are purchasing “interest only” and adjustable rate mortgages with artificially low initial payments at an astounding rate. It is estimated that within two years, $1 trillion dollars in mortgage debt (about 12% of all American mortgage debt) will “switch” to adjustable payments. 

When an innocent homeowner falls behind on his payments, the lender can take his home through a legal process called foreclosure. The lender then owns the home and resells it for a profit, often with another predatory loan to another unsuspecting victim, and the cycle begins again. Once the damage is done, it is difficult to reverse and many people lose their homes forever. Moreover, the damage done to a family’s credit can make it difficult for the homeowner to purchase another home in the future.

Nationally, home repair and home equity fraud have stripped value from the homes of an estimated 100,000 people in 29 states. However, there are steps you can take to protect your home:

Don’t take loans from contractors or door-to-door salespeople. The terms of a “Contract for Home Improvement Services" are almost never as good as a loan you could have obtained on your own. Worse, they may try to trick you into signing away your home by signing a "Deed of Trust" or a "Quitclaim Deed" disguised as a home improvement loan.
Act quickly if a lender pressured you into signing for a loan you didn’t want or cannot afford. The Federal Truth in Lending Act allows you three days to get out of a loan contract when your principal residence is used as security for a home equity loan. This “right of rescission” means you may cancel the loan for any reason, but only if you do it in writing within 3 days. Call an attorney to make sure it is done right.
Don’t trust a lender who claims "Your house has plenty of equity to qualify for a loan." Just because you "qualify" doesn’t mean you can afford the loan. In fact, to a predatory lender, the main factor that "qualifies" a homeowner for a loan is his inability to pay for it.
If your home goes into foreclosure, strange lenders will contact you to offer you new loans. These new loans are “quicksand” loans – they get you deeper in debt and make it more likely you will lose your home. Often, it would be better for a homeowner in this situation to sell his home and retain some equity.
In some cases, a strategic bankruptcy filing under Chapter 13 can enable you to preserve equity in your home and force lenders to accept “catch up” payments. At that point, the bankruptcy won’t do much more harm to your credit than the foreclosure did.
Beware bill consolidation plans. When you consolidate credit card or automobile debt through a home equity loan, you put up your home as collateral for that debt. Once you put that burden on your home, you can lose your home if you don’t make timely payments.
Look beyond the monthly loan payments – examine the loan’s interest rate, fees and contract terms and compare with other lenders to ensure the terms are competitive and fair.
Avoid loans that are set up as "interest only, non-amortizing or partially amortizing loans." With this type of loan, you still owe the original money you borrowed after you make all the regular payments and must make one large, final payment, known as a balloon payment. If you can’t make this last payment, you may lose your home through foreclosure.
Seek help from an attorney or accountant who understands financial matters before you sign. They are less expensive than you think and involving a professional early on saves you money later.

Marvin Wolf is a Newark attorney who specializes in consumer and bankruptcy law, real estate transactions and immigration. He practices in New Jersey and New York, and is admitted to the bar of the United States Supreme Court in Washington, D.C. He is a member of the National Association of Consumer Bankruptcy Attorneys, the Union, Essex and Middlesex County bar associations and has served as a volunteer consumer case arbitrator for the Better Business Bureau of Metropolitan New York. This article is intended to convey general legal information and should not be considered legal advice.