Released: November 12, 2006

Predatory lenders prey on Habitat homeowners

Source: BusinessWeek

The guiding principle of the nonprofit Habitat for Humanity, founded in 1976 to build affordable houses for underprivileged families, comes from the Old Testament: “If a brother living near you becomes poor, you must provide for himâ...do not make a profit on the goods you sell him.”

But that ethos doesn’t carry over to the many banks, brokers, and mortgage servicing companies that deal with Habitat families and, increasingly, are profiting handsomely from the financially naive.

Consider it another consequence of the housing boom. Habitat families are able to buy their homes for much less than full market value. A decade of rising prices has made them wealthier-on paper. At the same time, many are strapped for cash and unsophisticated about credit. For freewheeling brokers and lenders eager for refinancing business, the combination couldn’t be better.

“Habitat borrowers have targets on their backs,” says Michael Calhoun, president of the Durham (N.C.) Center for Responsible Lending.

Charles and Ann Williams of St. Paul, Minn., are prime examples. He’s a janitor, she’s a home child-care provider, and they have three children. Their annual income is $18,187, supplemented by Social Security benefits. In 1995 they built a Habitat house and took a $64,000 mortgage. Since all original mortgages in the Habitat program are interest-free, their monthly payment was just $396.

That changed last year. A flyer advertising an offer to refinance with New Century Financial Corp. in Irvine, Calif., looked tempting. Within three weeks the couple signed papers. The good news was that they were able to unlock $28,000 in equity, money they used to cover debts. But their new $81,000 loan carries an interest rate of 9% and payments of $872 a month, more than half their monthly income. And the loan’s adjustable rate can jump to 16% in two years. New Century says it has policies to ensure borrowers know what they’re getting into and that it is negotiating with the couple for a new loan on better terms. The Williamses declined comment.

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