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Modern urban renewal?

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xmrdfghap

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http://www.villagevoice.com./issues/0243/coates.php

Predatory Loans Have Residents Seeing Red
Foreclosing on Bed-Stuy
by Ta-Nehisi Coates
October 23 - 29, 2002

Barnabas purchased her two-story fixer-upper in 1991, and even if the house has yet to escape that designation, Barnabas counts her blessings that the deed is still in her name. Within a couple of years of buying the house, Barnabas almost lost it via a second mortgage she took out to make her home livable.

The second mortgage was for $180,000, more than three times what Barnabas paid for the house, and a hefty sum given her $26,000 gross annual income. More significant than the loan's size was the fine print, which reveals the intricacies of a con job that has swept through Bed-Stuy and working-class neighborhoods across the country. Equicredit, the company that provided Barnabas's loan, was a one-stop shop that handled her financing and even the contracting for repairs. One quarter of the money she borrowed—$45,000—went toward various fees that had nothing to do with fixing her home. Her interest rate was 12.95 percent at a time when the national average was 10.5 percent, bringing her monthly payment to $1981. On her limited income, meeting such a bill left her less than $185 a month to pay the rest of her bills.

Much of what gives Bed-Stuy its charm has made the area a target for predators. The neighborhood's most distinguishing feature is its trove of gorgeous brownstones. For years, despite their beauty, these homes did not attract much attention due to Bed-Stuy's reputation as a historically black neighborhood troubled since the '60s with crime and economic decline. Gentrification and an influx of new renters, followed by buyers, has been occurring at the edges of Bed-Stuy for almost 20 years. But with neighboring Prospect Heights, Clinton Hill, and Fort Greene drying up, and residents trying to kick-start development in the neighborhood, Bed-Stuy has become a jewel in the eyes of prospective buyers. "Folks just fell in love with the brownstones," says Don Baylor, legislative director for the Association of Community Organizations for Reform Now of New York (ACORN). "The demand just wasn't there 15 years ago."

Just as a matter of interest, could it be that an appraiser, working in conjunction with a predatory lender, is doing his job by encouraging over financing, and thus allowing the property to be recycled back onto the market at a higher price? Isn't his loyalty to the client's interest paramount? And in cases like this, isn't it in the interest of the community to evict those who can only make $26,000 a year to make room for those who make $100,000+ per year?

Is there a moral issue here and if there is, should we allow that issue to color business practice?
 

George Hatch

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Greg,

In a mortgage situation, it is going to be contrary to the client's best interest for the appraiser to do anything other than appraise the property properly. Sure, an unethical client working in concert with an unethical appraiser can make more money, in the short term, by over financing properties. But in the long run it could be for naught because the client, and the appraiser, have exposed themselves to criminal and civil actions by virtue of their unethical and illegal behavior. The appraiser's job (as intended by the banking regulations) is not to enable the lender-client make every loan that comes along by valuing the property as high as possible; the appraiser's job is to enable the client to make good loans by valuing the property fairly and properly.

Just because the property gets over-encumbered with a big mortgage via a bad appraisal does not mean that the subsequent sales price (after foreclosure) will take it out of one pricing category and put it in a higher one. The property is worth what it is worth. The costs that did or did not go into the property will not necessarily translate into higher values. Now, should a lender be making a $180,000 loan to a $26,000 income? No, but that is a separate issue that falls outside of the appraisal process. Actually, if said borrower can classify themself as a minority, they may have a discrimination case in here somewhere. "They're discriminating against me and trying to take my house away". Prolly easier to get some action on a discrimination case than on a predatory lending case.

Now, if your question is whether the appraiser's misconduct in such a situation is proving harmful to the borrower in this mortgage and represents a moral issue, I'd say there is no question. We all know that a bad appraisal serves no good purpose. Period. Sure, a borrower might take possession of a property they would not otherwise qualify for, and the lender might make a few extra (unearned) bucks on the mortgage fees, but they do so with greater risks than if they simply followed the rules they are supposed to follow.

Appraiser misconduct is harmful to everyone in the transaction except maybe a seller, who can just take the extra cash and run. It is also harmful to our own long term interests because it will always come to light to one degree or another. No bad loan is made using a bad appraisal without at least a couple people knowing the appraisal is bad, and thereby undermining our collective image as professionals.

IMO, if an appraiser conspires with a lender by producing an abusive overvaluation appraisal, thereby enabling an abusive over encumbrance mortgage, they should both be arrested and prosecuted to the fullest extent of the law. Double penalties for illegal discrimination motives. No mercy and no quarter.

George Hatch
 

Restrain

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Florida
As these are 2nd mortgages, it's quite possible that these are portfolio loans or loans through a wholesaler who does not particularly care for a real appraisal - tax valuation, AMV, etc will do. For that matter, they may well accept the LO's signature on a letter. After all, they'll get the property if the loan goes bad.

This is along the line of what Associates was doing - getting someone into a loan, then redo the loan, upping the amount, adding costs, etc.

Roger
 
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