Mortgage and Real Estate Blog

BankRate.com settles Bait-and-Switch Lawsuit.
 NovaStar, other Bankrate advertisers hit with $46 million judgment for false mortgage interest rate advertising.
 
 Bankrate agreed to pay $3 million in order to settle a lawsuit regarding alleged "bait-and-switch" advertisements that were appearing on the Bankrate.com site. Former advertiser American Interbanc Mortgage accused Bankrate of removing its ads from the site after American Interbanc claimed that other advertisers were promoting loan rates that were not honored. Customers who went to those sites were quoted higher rates than appeared in the advertisements, according to the claim. While Bankrate denied the allegations, testimony was presented indicating that Bankrate received hundreds of complaints about those "bait-and-switch" advertisements.
 
 Flashback to pre-internet days of mortgage lead generation advertising: You opened your hometown newspaper's weekly real estate section, and found a mortgage guide where several local lenders displayed rates, in a table or display ads, showing only rate and APR. The posted rates typically showed very low rates attainable only by paying a large amount of discount points, obscured but reflected in the APR. To make things even more opaque, publishing deadlines demand ad copy, and thus rates be delivered 2-3 days prior, rendering the advertising bait, relatively meaningless.
 
Around 1996: Bankrate takes on this game, and puts it on steroids by making bait-n-switch rate a national game, not a local one, with a simple click.
 
 June 2007: Over 10 years later, successful litigation finally holds some of the these bad-players accountable. The bad lenders in this case went beyond simply practicing false advertising. They were convicted of conspiring to prevent another lender from doing business in good faith!
 
 Hopefully the press generated from this lawsuit will get the attention of the regulators who need to start enforcing and hopefully even giving some more punitive muscle to Regulation Z, and RESPA (the laws governing such practices). The current practice of doling out small fines and slaps on the wrists, will never change current bad lender behavior.
 
 Unfortunately, a quick survey of BankRate.com's site shows a large number of their advertising lenders are still doing what they have for years - posting rates, costs, and APR's that they will never honor, but are designed to get your attention.
 
 Furthermore, to make it even worse, the media (TV, newspapers, internet, etc.) constantly portray BankRate as the almighty, and quote their "average" rates everywhere. But the average is based on the phony advertising, and huge discount points most people don't pay, therefore the "average" they quote is completely worthless.
 
 For REAL rate averages, look at Freddie Mac's weekly rates at http://www.freddiemac.com/
 
 THE LAWSUIT: The successful lawsuit against Bankrate Inc. claimed that the popular website, intended to help borrowers, actually misleads them because many lenders posting rates don't really honor those rates. These are usually the lenders quoting the "lowest" rate. The lawsuit alleges that this also puts honest advertisers on the website at a competitive disadvantage.
 
 American Interbanc Mortgage LLC, an ex-Bankrate.com advertiser, sued Bankrate for $16.5 million in damages and a $33 million in punitive damages. The lawsuit began back in 2002 when American Interbanc Mortgage sued other Bankrate advertisers claiming their rates were unrealistic and put American Interbanc Mortgage at a disadvantage. Later, American Interbanc Mortgage added Bankrate to the lawsuit, after Bankrate did not renew American Interbanc Mortgage's advertising agreement.
 
 American Interbanc Mortgage alleged, and successfully proved that Bankrate knew what some dishonest advertisers were doing and let it happen. Court documents indicate that Bankrate has had hundreds of complaints about advertisers' posted rates. The Wall Street Journal reports that one Bankrate advertiser confided to a Bankrate employee saying the borrower would require a "direct pipeline to God" to get the rate they had posted.
 
 Bankrate's reach is wide. Their partnerships with Yahoo and AOL along with their newspaper presence allow their rate tables to be displayed to millions of people on a daily basis, although accuracy is a huge problem.

Banned in Minnesota: Credit Report Trigger Leads

One of the better pieces of legislation to come out the Capital in Saint Paul this year is a law banning the sale of what are known as "trigger leads".

The new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person's credit history was requested in connection with a mortgage loan application.

In other words, until today, any time you applied for a mortgage, or had a mortgage lender run your credit report, that information, along with whatever other data was available in your file (credit score, current address, telephone number, loan balances, etc.)  was immediately sold by the credit repositories - Experian, Equifax, Trans-Union, to all sorts of bad lenders from coast to coast. They would then use that data to solicit you for a loan, often using shady bait-and-switch tactics to trick you into doing business with them. 

The credit bureau's defend the practice by saying it gives more "choice" to the consumer.  The realtity is it was a money making(as if anyone would choose to be hounded by lenders who will try to trick them.)

It WAS a perfectly legal practice in Minnesota.  The good news is it no longer is here, and for the rest of the states, you can opt-out, so your name is not included in these trigger lists.

Though we have always recommended shopping for a mortgage lender to work with, this should be done on your terms, with a lender of YOUR choice, as opposed to someone who paid good money to get your name, then would say or do anything to recover their costs.

Trigger leads are a horrible practice, a breach of consumer privacy, and need to be ended nationwide as soon as possible. 

The Law

Down at the Capital in Saint Paul, and Sponsored by Rep. Kurt Zellers (R-Maple Grove Minnesota) and Sen. Warren Limmer (R-Maple Grove Minnesota), a new law prohibits consumer reporting agencies or any other business entity from selling or exchanging with a third party information that a person's credit history was requested in connection with a mortgage loan application, unless the third party holds an existing mortgage loan on the property. Most of the law takes effect Aug. 1, 2007.

The law also contains provisions for:

• increasing the dollar amount and other aspects of the homestead exemption from creditors, and provides for inflation adjustments;

• prohibiting real property from being subject to execution under certain conditions involving the homestead or other property rights of non-debtors, such as the spouse of the debtor;

• modifying provisions relating to the sale of homestead property; and

• building contractors to bring action against subcontractors for contribution or indemnity. This provision is retroactive to June 30, 2006.

Minnesota's new anti-predatory lending laws.

GOOD, BAD, or BOTH?

Saint Paul, MN.: Minnesota has recently passed a trio of laws aimed at the mortgage lending industry designed to "protect" consumers from so called exploitive business practices. Sounds good on the surface, but I am never pleased to see the government act as a nanny to prevent adults from hurting themselves by running with scissors, but this is exactly what you get when seriously uninformed consumer activists groups, consumers, and legislature approve such measures.

I'll be the first to say that unfortunately, there has been what appears to be an explosion of bad lenders, and that better regulatory rules and practices would go a long way to limiting some of these practices. Many of the items now passed into law make sense. For example, tighter licensing requirements, and mandatory approved training of loan officers.

Many of the others sound good to the uninformed, but in reality are not.

One example is banning prepayment penalties. While everyone "hates" prepayment penalties, the economics of why lenders have them makes sense. They are not some ruthless tool lenders impose to rape consumers. Take them away, and lenders will simply raise rates across the board to offset the economic impact of lending money. Simply put, lenders must make a return on their money, or why bother lending it at all. Taking away this tool, and those actually harmed will now be greater that those who will supposedly benefit.

Consumers clearly don't like prepayment penalties, but most recognize the tradeoff for an initial lower rate. Also, just for clarity, probably less than 10% of the loans I write for consumers have prepayment penalties.

Another great example is that Minnesota has now essentially banned nonbank lenders and brokers from providing negative amortization loans (like Option ARMs) and stated income / no documentation loans. These two great loan products have been highly abused by unscrupulous lenders and uninformed consumers across the country. These two loans have also added significantly to the recent high foreclosure rates.

These two loan products have been around for years. The Option ARM was "invented" back in 1981. Both have only recently gotten a black eye. So one must ask why? Simple. Consumers have learned they exist, and are asking for them. Consumers who have mismanaged their finances, maxed out their credit cards, and bought a bigger house than they could afford have BEGGED lenders to help lower payments. Lenders responded with loans that could help short-term, but with huge risk. Sadly for many, the short term gamble hasn't work out.

Furthermore, the stupidity of these law written at the capital in Saint Paul is that Minnesota can NOT override federal banking laws. Therefore any "Bank" (Wells Fargo, US Bank, Countrywide, Chase, etc.) does NOT have to follow these laws and can continue to provide these loan products. All they have done in passing these laws is to take away a huge portion of the competition. Therefore the banks, thanks to the legislature, now have exclusive rights to people needing these loans. This lack of competition will inevitably force rates WAY UP on these products.

Also, you must understand that NO LENDER anywhere in the country has ever sat down at a board meeting to say; "what loan product can we invent that will be abused, and two years later we will suffer huges losses." The industry estimates they suffer a loss of $50,000 on EACH FORECLOSURE. Lenders know how each loan product performs, and started restricting guidelines on these products, making them dramatically harder to get long before our legislatores in Saint Paul stepped in.

Finally, it was interesting to watch Channel 9 last night with another story on foreclosures... It was of course tilted towards "bad lenders", but BOTH PEOPLE highlighted losing their homes ADMITTED that the loan officers clearly explained the details of the loan they were getting.

So much for it always being predatory lenders... How about we focus just a little bit more on personal responsibility. From what I see every single day, I lay 70% of the blame on consumers, and 30% on bad lenders.

NOTE for clarity: Our two companies, Mortgages Unlimited and Great Rivers Mortgage have NEVER practices anything even remotely close to what would be considered predatory and have specific policies and procedures in place to immediately remove Loan Officers caught doing anything wrong. Because of this, we are relatively uneffected by the vast majority of the new Minnesota law changes

The Current State of Mortgage Financing...What's Going On?

Anyone watching or reading the financial news over the last few months has seen a lot of angst and consternation over the state of the mortgage industry. In fact, many of the larger lenders in the US were forced to shut down operations recently. But why? What is happening, what does all this mean to you and most importantly... what should you be doing do right now to make sure you are protected?

Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - it's called a "jumbo loan" - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis", and is exactly what happened to most of these mortgage companies - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.

Further, even when a lender is able to take some losses, they may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses...the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

In response to seeing this situation play out, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

What happens next?  The major damage is probably already done, and the present situation will likely settle out over the coming year.  Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.  

All your normal traditional plain vanilla loan products are still available, and at very attractive rates (30, 20, 15-year fixed). FHA, VA, etc. 100% zero down financing is still looking good. A new program called FHASecure (which we offer) has become available to help many people caught up in todays credit crunch.

Your home and your financing are just too important, and times have changed. I am here to help and advise during these volatile times - and would welcome calls from you, your friends, family, neighbors or coworkers.

Credit Repair Companies. Good or Bad?
Aren't most repair repair schemes basically rip-offs or illegal?

There are a lot of credit repair firms and credit counselors that have not acted in the best interest of their clients and this has certainly given the business a bad name. But that does not mean that the basic concept is not good. As a matter of fact--improving credit scores is even more important in today's market. With the current credit cruch, expect a harder time getting anything with weak credit.

Freddie Mac has just implemented adjustments for anyone under 680 credit score. The mortgage insurance companies are adjusting their rates and refusing to supply mortgage insurance to anyone with a score lower than 575. Fannie Mae and everything else is expected to follow shortly.

The national average credit score is around 680. Approximately 10 million people may get a new mortgage this year, but 80 million others have credit problems and can't get a mortgage that will help them achieve their dreams.

Self Help May Be Best

You see the advertisements in newspapers, on TV, and on the Internet. You hear them on the radio. You get fliers in the mail. You may even get calls from telemarketers offering credit repair services. They all make the same claims:

• "Credit problems? No problem!"
   
• "We can erase your bad credit - 100% guaranteed."
   
• "Create a new credit identity - legally."
   
• "We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!" 

Do yourself a favor and save some money, too. Don't believe these statements. Only time, a conscious effort, and a personal debt repayment plan will improve your credit report.

The Scam

Everyday, companies nationwide appeal to consumers with poor credit histories. They promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. The truth is, they usually can't deliver. After you pay them hundreds or thousands of dollars in fees, these companies do nothing to improve your credit report; most simply vanish with your money.

The Warning Signs

If you decide to respond to a credit repair offer, look for these tell-tale signs of a scam:

• companies that want you to pay for credit repair services before they provide any services.
   
• companies that do not tell you your legal rights and what you can do for yourself for free.
   
• companies that recommend that you not contact a credit reporting company directly.
   
• companies that suggest that you try to invent a "new" credit identity - and then, a new credit report - by applying for an Employer Identification Number to use instead of your Social Security number.
   
• companies that advise you to dispute all information in your credit report or take any action that seems illegal, like creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution. 

You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to lie on a loan or credit application, to misrepresent your Social Security number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

Under the Credit Repair Organizations Act, credit repair companies cannot require you to pay until they have completed the services they have promised.

The Truth

No one can legally remove accurate and timely negative information from a credit report. The law allows you to ask for an investigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this. Everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost. According to the Fair Credit Reporting Act (FCRA):

• You're entitled to a free report if a company takes adverse action against you, like denying your application for credit, insurance, or employment, and you ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You're also entitled to one free report a year if you're unemployed and plan to look for a job within 60 days; if you're on welfare; or if your report is inaccurate because of fraud, including identity theft.
   
• Each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - is required to provide you with a free copy of your credit report, at your request, once every 12 months.
  The three companies have set up a central website, a toll-free telephone number, and a mailing address through which you can order your free annual report. To order, click on annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can print the form from ftc.gov/bcp/conline/edcams/credit/ . Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. For more information, see Your Access to Free Credit Reports at ftc.gov/bcp/conline/edcams/credit/ .
  Otherwise, a consumer reporting company may charge you up to $9.50 for another copy of your report within a 12-month period.
   
• You can dispute mistakes or outdated items for free. Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under this law, contact the consumer reporting company and the information provider.