With hopes of improving their homes, many owners fall prey to loan scams LOSING EQUITY

September 04, 1994|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

They're wooed with promises of roof repairs or new kitchen floors or offered a chance to pay off debts using hard-earned home equity.

But sometimes, after being unwittingly lured into signing second mortgages with high interest rates and fees, homeowners see little of the promised work or fall behind on payments they can't afford. Some lose their homes in foreclosure. Often, they have no recourse.

A growing number of home equity scams in Baltimore and throughout the United States are bilking homeowners out of their homes, according to a report released last week in Washington by a national consumer group. Victims of expensive scams by con artists and unscrupulous lenders tend to be elderly, poor or minorities. Others live in neighborhoods overlooked by mainstream lenders who might offer loans at market rates, the report says.

A survey of legal service offices in 24 states by Public Citizen, founded by consumer advocate Ralph Nader, documented more than 5,000 complaints over the past five years, 500 in Baltimore.

One complaint came from Mack and Jacqueline Moon of East Baltimore, who hired a home improvement contractor to install a dropped ceiling, paneling and cabinets in the unfinished basement of their new Harford Avenue rowhouse. The couple refused the offer of financing through a second mortgage, Mrs. Moon said, anticipating they'd need backup money to pay medical expenses after their 10-year-old daughter contracted lupus.

They signed the contract a few days later only after a second salesman assured them, "We were able to work it out, and you don't have to worry about a mortgage," Mrs. Moon said.

The Moons, a driver for a pharmaceutical company and an accounting assistant, were never given copies of the loan documents or told of the 17 percent interest rate. A year later, when they tried to use their home's equity to pay bills for their daughter, who has since died, they discovered the lender had taken a second mortgage after all.

"We told them specifically we would never put another mortgage on our house for the basement because we didn't know what we'd need for our child," Mrs. Moon said. "They did it anyway."

In "Stealing the American Dream: A Survey of Legal Aid Attorneys on Abusive Home Equity Lending," Public Citizen called for tougher federal laws and stricter enforcement to combat abuses that have risen in the past decade, since home equity loans first became popular. The group charged that fraud legislation passed by Congress this year falls short, failing to increase authority for states to cap interest rates and fees.

Lenders can legally charge above-market rates for home equity loans -- secured by a home and used to pay home improvements or to consolidate or refinance debt. But in fraud cases, lenders nTC hook consumers with high pressure tactics, deceptive advertising, lies or false claims about the product.

Often lenders persuade borrowers to pay off a low-rate first mortgage with the proceeds of the new loan, making the lender first mortgage holder. Others broker high-rate loans, against their clients' best interests, for a fee. They boost loan costs by offering deceptively low monthly payments that initially omit interest charges or by incorporating high fees into the principal. Some withhold information on interest rates, fees and terms.

In the past five years, hundreds of Baltimore consumers who have complained of being swindled by loan sharks have turned to the legal program at St. Ambrose Housing Aid Center, a participant in the survey.

In one of the most common scams, said managing attorney Elizabeth Renuart, home improvement contractors go door to door or pass out fliers advertising sales on home improvements. They pressure homeowners to immediately sign contracts and promise to arrange for financing later. The contractor often works in partnership with a lender who deals in high-cost loans. Often the work turns out shoddy or overpriced, Ms. Renuart said.

In one case, a 78-year-old couple agreed to a set monthly payment for installation of a ceiling fan and vinyl kitchen flooring. They weren't told about high interest rates, which added to work valued at $1,200, costing them $5,600, Ms. Renuart said.

"Most often the clients we see are low-income and very excited about owning a house. It's the only major asset in their lives, and they're very willing to make the payments," she said. But "the cost of credit for low-income folks tends to be higher than for middle-income because they can insist on market rates."

Problems with high interest loans often arise after a borrower loses a low-paying job or becomes disabled, or falls behind on payments he can't afford. About half her clients have been threatened with foreclosure, she said.

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