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Cover Story

Open for foreclosure

Spike in mortgage defaults fuels debate over "predatory lending."

LoanGiant CEO Jack Wolfe (l) and President Andy Jacobs say their loans are a service to Detroiters.
Former banker Veronica Wiliams tries to help people keep their homes.
LoanGiant ads (above) are everywhere around Detroit.
Motgage broker Mike Wagner says some sub-prime loans are "immoral."
SEE ALSO
More from Lisa M. Collins

Ode to Kilpatrick (11/12/2008)
Memories from a reporter who believed

A grand visionary (5/21/2008)
Artist Matthew Blake helped make Detroit the city we love

Fashion that walks the line (4/25/2007)
Eugenia Paul goes for vintage with a twist

 

Published 4/30/2003

Edythe Ford and her kids live near a tree-lined park in the charming eastside neighborhood where Ford grew up. Her son goes to school down the street. Her grandmother lives a block away. They all attend the same church.

Unfortunately, Ford and her kids might not be in the neighborhood much longer — they’re getting evicted.

Last month, the Wayne State University employee’s house was sold in a sheriff’s sale after her high-cost mortgage went into default — one of thousands of such cases already this year in an alarming new trend threatening Detroit-area communities.

Ford bought the house for $10,000 four years ago. She says it was a “dump” — the master bedroom looked up to the sky. Always Mortgage of Detroit assessed the property at $110,000, provided repairs were done. Ford and her husband took out a mortgage loan for $97,000 and set to work.

Six months into the 1999 mortgage, Ford’s payments increased from $800 a month to $1,049 — the company said insurance premiums went up — and her interest rate went from 8 percent to 9 percent. When she tried to refinance, she found she was stuck with a bad appraisal and a worse mortgage agreement.

Two separate appraisers valued Ford’s house at $68,000, though it appears to be in great condition. She owes $118,000 on it to U.S. Mortgage of Las Vegas, which bought her loan from the company that bought it from Always Mortgage, which is now defunct.

“I’ve got two kids, I’m broke from a divorce, and there’s nothing I can do,” says Ford, who hopes her lawyer can stave off eviction. “I just want a decent place to live. … If people have to move out, it makes it bad for the city.”

Ford is not alone. In Wayne County, mortgage foreclosures skyrocketed from 1,900 in 1996 to nearly 7,000 last year. At the pace of foreclosures so far in 2003, the county could witness more than 8,000 mortgage foreclosures by New Year’s Day, more than four times the total of a decade ago.

Nationwide, foreclosures have spiked in recent years in tandem with a boom in the so-called “sub-prime” mortgage lending market — where high fees and interest rates are charged to borrowers with shaky credit. Homeowners with sub-prime loans are 15 times more likely to face foreclosure than those with lower-cost loans from major banks, federal statistics show.

Marketing phrases like, “Need cash quick? Good credit or bad, give us a call!” and “Don’t miss the boat! Cash in on low interest rates!” entice people to use their homes as collateral for quick money fixes. The pitch works.

In 2001, an estimated 27,000 sub-prime mortgages were sold in the Detroit metropolitan area, up 5,000 from the year before. Nationally, sub-prime mortgages increased 1,000 percent in a decade, according to industry data.

Congress paved the way when it erased caps on interest rates for home loans in the 1980s. Today, brokers can charge as much as they’d like — as long as Wall Street bankers are willing to fund the deals. So when property values increased during the 1990s, leaving a mass of cash-poor people with newfound equity in their homes, the market was ready.

During the ’90s in Michigan, the number of state-licensed mortgage brokers multiplied tenfold, to more than 3,000 today.

Despite the boom, regulation is lax. Michigan’s Office of Financial and Insurance Services Commission has only five specialized field officers to police the industry and to enforce state and federal usury laws. Sixteen additional officers assist in oversight, but they have other responsibilities.

As more families lose their homes to the high-cost loans, the term “predatory lending” is increasingly at the center of volatile legislative, political and legal battles. States including New Jersey, New Mexico, California and North Carolina have passed stringent laws to curb predatory loans — loosely defined as those with excessive or hidden fees and costs.

Sometimes predatory lenders commit outright fraud, other times, they steer creditworthy people to high-cost loans, according to a recent U.S. Department of Housing and Urban Development report. Some predatory lenders grant mortgages knowing the borrower’s income is hardly sufficient to pay it back, reports HUD.

Last year, the Detroit City Council spent months debating an ordinance to prohibit predatory lending. The measure failed under pressure from the banking industry, which said the move would devastate the city’s high-cost mortgage industry.

But activists say Detroit — even more than other cities — must take action.

“When you look at an already depleted tax base, the city is shooting itself in the foot by not doing anything about predatory lending,” says Brian White, a policy director for Detroit’s NAACP. “It’s a social-justice issue. It’s tearing at the fabric of our community, and hurting the viability of Detroit.”

Borrowing while black

Sub-prime loans are legal and most are not predatory.

But most predatory lending takes place in the sub-prime market, where higher rates and fees are charged to compensate for the risk of lending to people with dubious credit, HUD reports. Regulatory gaps encourage the practice — major banks are policed by the federal government; sub-prime lenders fall under state jurisdiction.

Trouble is, not all sub-prime borrowers have poor credit. Predatory lenders target African-Americans, women, the elderly and lower-income individuals, according to multiple reports.

In fact, HUD reports that upper-income blacks are more likely to get a high-cost loan than low-income whites.

It’s a national phenomenon that’s become acute in Detroit. According to a study released in March by the National Community Reinvestment Coalition (NCRC), the five-county Detroit metropolitan area ranks fifth-worst in the nation for the prevalence of high-cost refinancing for minorities, women and lower-income groups. It also ranks fifth-worst for disparities in lending to women.

The coalition reports that in 1999, prime-rate lenders, mainly banks, granted a mere 8 percent of their market-rate, standard-cost refinance loans to African-Americans in the Detroit metropolitan area. Census figures indicate that African-Americans comprise 21 percent of the metro population.

According to NCRC, which analyzed U.S. Home Mortgage Disclosure Act data in 25 metropolitan areas:

• In metro Detroit, African-Americans are 5.7 times more likely than whites to get sub-prime loans when they refinance. Latinos are 1.7 times more likely.

• About a quarter of upper-income African-Americans who refinance get sub-prime loans, compared with only 4 percent of upper-income whites.

• In Detroit area neighborhoods that are more than 80 percent black, 50 percent of home refinancings are sub-prime.

• African-Americans are more than twice as likely as whites to get denied a prime-rate mortgage in the Detroit metro area.

Freddie Mac and Fannie Mae — federally sponsored banking institutions that purchase more than 20 percent of American home mortgages and sell the notes on the international market — report that 35 percent to 50 percent of people who receive sub-prime loans are actually eligible for lower-cost, prime-rate loans.

“This is the dual lending marketplace,” says David Berenbaum, senior vice president for NCRC. “If you are white and upper-middle income, you’re going to get the best products. But if you’re black or Hispanic and live in an urban area, you’re going to get a high-cost product.”

In the city of Detroit, a dearth of major bank branches and the prevalence of sub-prime lenders leave homeowners with few options, says Veronica Williams, executive director of the Detroit Alliance for Fair Banking, which works to improve lending in the inner city.

Major banks comply with federal minimums for loaning to low- and moderate-income individuals in Detroit only because they purchase sub-prime mortgages on Wall Street, Williams claims.

“The banks aren’t going to give you a 14 percent loan. They are not,” she says. “But they’ll buy it and sell it” on Wall Street, she says.

Some banks are working to improve lending in Detroit. Bank One recently announced a plan to invest $3.1 billion in the city through 2004, while Fannie Mae is investing $50 billion in affordable housing in Michigan through 2007.

A recent U.S. Department of Treasury report states that major banking institutions increased lending to low- and moderate-income borrowers by 80 percent from 1993 to 1998. After the increase, major banks and thrifts were giving 28 percent of their original mortgage loans to low-income communities, the report says.

Meanwhile, efforts to find real estate attorneys willing to work for free to counsel and help victims of predatory lending in Detroit have been fruitless, says Rita Hillman, Fannie Mae’s Detroit director.

The hard sell

Sub-prime lending has revolutionized America, allowing people with poor credit and lower incomes to cash in on the value of their homes, says Andy Jacob, president of Southfield-based LoanGiant.

Historically, banks have reserved lending for folks with money, because they’re more likely to pay it back, he says.

“Middle America is under siege,” says Jacob. “We have the highest credit card debt in history, the highest default rate in history, people have lost their jobs, lost money on their 401ks and on the stock market. The only place where people have the ability to be their own bank is in their home.”

On radio, TV and billboards, in full-page newspaper and phonebook ads, Jacob proclaims, “Cash is just a click away. Call or click today and you could be a multimillionaire tomorrow.”

The enticements are effective. Last year, LoanGiant — which has 240 employees, 120 of them loan officers — closed more than 3,000 sub-prime loans, according to federal data, making it the largest provider of high-cost mortgages in metro Detroit. Jacob says 35 percent of applicants are denied.

Jacob started LoanGiant in 1990 with lifelong friends — two lawyers and a real estate investor. He’s the marketing guru. Since then, the company has flourished, putting millions of dollars into technology, expansion and political contributions. Jacob estimates the company spends $350,000 a month on advertising, has made millions in charitable contributions since 1990, and brokers about $900 million in mortgages a year.

LoanGiant makes about $4,000, before costs, on an average sub-prime loan, Jacob says, or at least $12 million a year. It generates millions of dollars more on prime-rate loans, not to mention the company’s other business ventures.

But not everyone is enamored of LoanGiant.

In January, Michigan’s Office of Financial and Insurance Services Commission issued a notice to LoanGiant, listing 14 alleged violations of state and federal lending laws, including failure to: keep proper records; put money paid for taxes and insurance into escrow accounts; follow the Fair Credit Reporting Act, which requires lenders to inform borrowers of the terms in their loan; and inform borrowers of true interest rates.

The action came after the state audited LoanGiant in 2001 and “found some things that we would allege are violations of the law,” says Frances Wallace, OFIS chief deputy commissioner. Wallace says such findings are common, yet serious.

Jacob says 14 findings of alleged wrongdoing are pretty good, considering the thousands of loans LoanGiant closes.

In February, LoanGiant provided documentation to the state to show compliance with the law. When a state review of the materials is complete, officials will decide to either settle the issues with LoanGiant, or to suspend or revoke the company’s license. Settlement can include restitution and fines. In an extreme case, the state can refer matters for criminal prosecution, though that is rare.

So far, the state’s complaints haven’t hurt business.

On a recent cold spring day, LoanGiant’s office is a hive of activity. Thousands of callers ring in every month, looking for fast cash and freedom from looming debts.

Hallways are covered with plaques and framed letters commemorating contributions to politicians and charities. Jacob is pictured posing with everyone from Detroit Lions owner Bill Ford to U.S. Sen. Debbie Stabenow, with politicians from as far away as New Jersey.

Today, Jacob sits down in a small empty office — not his — for an interview, explaining that there’s nothing “fancy shmancy” about LoanGiant, just “people doing things for people.”

He is well-tanned, dressed in a sharp suit with jeweled cuff links. A consummate salesman, Jacob pushes his new low-cost loan as if looking for a spontaneous sale. It’s just part of LoanGiant’s plan to become the Wal-Mart of sub-prime lending, Jacob says.

“We know the lowest-cost loan will win,” says Jacob. “You can only do that with volume.

“I’m revolutionizing the industry myself,” he says.

Jacob bristles at those who call sub-prime lenders predatory.

“It’s unfair. It’s unbalanced. It’s a slap in the face to myself and my partners and to all the people we’ve helped in this city,” he says, pointing to national statistics showing that 97 percent of sub-prime clients never face foreclosure, while 94 percent never default. “Let’s talk about the hundreds of thousands of people that got our loan and didn’t complain, people who were empowered to take control of their finances.”

Jacob says he can’t provide statistics on foreclosure rates for mortgages his company brokers. The company sells nearly all of its loans, shortly after closing, to GMAC-Residential Funding Corporation — a subsidiary of General Motors Acceptance Corporation, Jacob explains. GMAC-RFC then sells the loans to other companies.

The system is the norm in the mortgage industry. Nearly all home loans are sold at least twice. Since LoanGiant doesn’t hold the notes when foreclosures occur, the company’s name doesn’t show up on foreclosure documents.

In this way, the system protects both investors and mortgage brokers, by spreading risk and liability. If a homeowner defaults, the note holder can foreclose.

Jacob believes the system is fair and efficient.

So last year, when the Detroit City Council formulated its anti-predatory lending ordinance, Jacob was front and center. He virulently opposed the final version of the ordinance, saying it would have dried up sub-prime lending in Detroit and robbed residents of the chance to borrow against their homes. Meanwhile, the council largely ignored efforts by Jacob and other lenders to donate a percentage of every loan to beef up financial law enforcement and education in Detroit.

The council’s ordinance would have outlawed pre-payment penalties — a controversial fee charged when a mortgage is paid off early, something Jacob says is necessary to make a fair profit.

Jack Wolfe, LoanGiant CEO, was furious at the City Council over its predatory lending ordinance. In a letter dated Dec. 24, he wrote the council: “We will hold each of you personally accountable. You will not use the Detroit taxpayers’ money to defend yourselves as we will do everything in our power to block this. You must personally pay to defend your inexcusable action in passing this ordinance.

“If it was a fight you wanted, you now have one. You are predatory politicians … You do not know us … You have no right to disrespect us.

“The Detroit City Council is an unjust regime. You have failed to overcome your selfish motivated interests and to legislate in a fair and just way.”

Wolfe says the council is “crazy.” The ordinance, he says, was nothing more than a council attempt to get favorable headlines.

“Do not make a law that prevents me from doing business,” says Wolfe.

Wolfe acknowledges that in the past, LoanGiant charged what it could.

“We don’t try to figure out the lowest cost possible,” says Wolfe. “We did things that were consistent with the marketplace. If we could charge four points [as a percentage fee on the loan], we did. We could have charged two.”

That’s changing now, Wolfe says. The company intends to charge the lowest price with the aim of dominating the market.

As the interview ends, Jacob says he’s willing to sit down with anybody who claims to have been exploited by LoanGiant, and he’ll work it out.

“I’m their financial friend for life,” says Jacob.

Buyer beware

Ivylearn Mormon might want a sit-down with Jacob, but right now, she is stressed out. The school bus-driver’s son is deployed to Iraq and she nearly lost her home near Six Mile and Hoover.

Mormon and her husband bought their home for $25,000 in 1975. In 1990, her husband was killed in an accident, leaving her to raise their three sons.

By 1997, she owed just $7,500 on her house note. That year, a family emergency cropped up; she needed cash. Enticed by a radio ad, she refinanced.

The total value of the refinancing was $18,000. She got $6,000; the mortgage company took $4,000 and gave her a 14 percent interest rate.

A year later, she refinanced again after seeing Jacob on TV. The total value of the mortgage was $28,000. She got $6,000 cash; LoanGiant got $2,600 and paid $1,100 in back taxes for her. Her interest rate was 10.7 percent.

Mormon insisted on keeping the monthly payment around $260, all she could afford. To accomplish that, LoanGiant gave her a 30-year loan with a $23,000 “balloon payment,” due all at once, in 15 years. The big future payout allowed for smaller monthly payments.

This time, however, her house payments didn’t cover insurance and taxes. For Mormon, as for countless others, this was her undoing.

Mormon made payments to Fairbanks Capital Corp. of Salt Lake City, the company that ended up with her house note. Fairbanks ranks among the top complaint-getters with the State of Michigan, and Mormon says she had countless problems with the agency.

She got behind on the taxes. Foreclosure loomed when Mormon heard an ad regarding predatory lending from the Association of Community Organizations for Reform Now (ACORN). She called Richard Winslow, the group’s Detroit director.

Winslow put Mormon in touch with Wagner Mortgage in Lake Orion. Because she had good credit and some savings, Mike Wagner, a mortgage broker, was able to refinance her house at 8 percent and save her from foreclosure. The amount of the new mortgage was $32,500; Wagner got $2,165 in closing costs, and the rest went to pay back taxes. Wagner says the closing costs were high because he had to get two appraisals.

He says he had a “nightmare” of a time reaching Fairbanks, the note holder, to discuss Mormon’s loan.

“They wouldn’t answer the phones, it was impossible. I think that was intentional,” Wagner says.

Wagner says he was infuriated by the balloon payment LoanGiant included in Mormon’s loan. It would have been due in 2013.

“When this woman was 62 years old, and this is where I get really mad, her $28,000 mortgage would have been $23,000, she would owe that [lump sum], and she’d have two choices, refinance or lose the house. Where is a 62-year-old black woman going to get a job to keep that house?”

Jacob says balloon payments are commonplace in the mortgage market, even for upper-income people. Some investors favor them, just as some investors discourage tax and insurance escrow accounts, as they are expensive to administer, he says.

“This wasn’t a LoanGiant decision, this was a Wall Street decision, a decision made by people upstream who were buying the loans,” Jacob says.

In the end, over the three loans, Mormon got $12,000 in cash and lost all the equity in her home. Her 30-year mortgage on her $64,000 home won’t be paid off until she’s 80.

“It’s a horrible, dirty thing,” says Mormon. “I’m paying for my house all over again. You work your whole life for something, and someone comes and tries to take it away from you.

“It’s highway robbery without a gun.”

Wagner says nothing done in Mormon’s case was illegal, but in his opinion, “It’s just not right.”

Reform effort

At the request of the NAACP, the Detroit City Council set out last year to do something about sub-prime lending. Six months of hearings and testimony exploded around Thanksgiving with rancorous battles between bankers, housing activists and council members.

The bankers won.

Ignoring advice from the city Law Department, the council adopted an ordinance on Dec. 19 that would have clamped down on sub-prime lending in Detroit. The ordinance would have capped interest rates and fees, required borrowers to get counseling from city-designated experts before signing mortgage papers and required lenders to report statistics to the city Finance Department (which said it didn’t want the job).

It would have made underwriters like Fannie Mae, GMAC-RFC and others liable for the sub-prime loans they fund when they buy them in blocks of hundreds on Wall Street. Consumer activists across the country have backed such measures, claiming that big banks and Wall Street fund predatory lending, and therefore should be liable for the resultant ills.

Bankers and brokers protested Detroit’s ordinance, claiming it would quash residential lending in Detroit, which relies on high fees and interest rates to meet profit margins. Lenders said investors would pull out of the market if held directly responsible for the actions of individual brokers.

Joon Sung, managing attorney at the Legal Aid and Defender Association, helped draft the city’s anti-predatory lending ordinance. He says it was tailored to withstand legal challenges and was modeled after laws in other states.

Opponents of Detroit’s ordinance pointed to Cleveland and Georgia, where some lenders pulled out after anti-predatory lending laws were adopted. Advocates say North Carolina’s stringent state law, the first in the nation, adopted in 1999, didn’t diminish loans to those with shaky credit; opponents refute this claim.

Sung says regulation is vital; he’s seen foreclosures and predatory lending “multiply exponentially” in recent years. About half the clients who come to Legal Aid in foreclosure are victims of “predatory” loans, he says.

Laws on the books are limited, forcing lawyers to make a case of fraud against companies.

“Is all sub-prime lending predatory? I think by its nature it is,” says Sung. “The risk borne by the lender does not justify the extremely high costs and interest rates.”

Comerica Bank opposed Detroit’s predatory lending ordinance, “not because we do it, but because of the reporting requirements,” says David Littmann, chief economist at the bank. “There’s an immense cost to the hometown financial institutions to comply with something they don’t have any reason to report on, since they’re not involved. We have other things to do.

“This is the kind of the thing ruining the business climate and growth prospects for the city of Detroit. That’s not to say there are no evildoers out there. There certainly are. But don’t saddle everybody.”

Before City Council adopted its ordinance, former Republican Gov. John Engler and the banking lobby convinced Michigan lawmakers to prohibit local governments from passing such laws. The council passed its measure anyway.

On Dec. 27, Mayor Kwame Kilpatrick vetoed the ordinance, citing the new state law and contending the city law would generate lawsuits against the city, cost too much to enforce and fool residents into thinking they were protected. Kilpatrick declined to comment for this story.

Councilwoman Sheila Cockrel, the lone vote against the ordinance, scoffs at fellow council members who, despite a loud public fight on the matter, failed to meet during Christmas recess to overturn the mayor’s veto.

“It was political theater,” said Cockrel after the vote. “Monitoring banks and managing banks is not a local issue. Banks are state and federally regulated.”

Cockrel says the problem is education. During hearings, she notes, some aggrieved people said they signed blank documents.

“If you sign a blank document, you’re going to be messed over,” says Cockrel. “There is a serious problem here. Poor people are the victims. We need to do something to protect people. But we need to do something that makes sense.”

State Reps. Steve Tobocman, D-Detroit, and Dave Woodward, D-Royal Oak, are drafting legislation to outlaw specific predatory lending practices in Michigan. Tobocman says the challenge will be to convince legislators that there’s a need. Also, the banking industry must get on board, he says.

“I think it’s a matter of economic justice,” says Tobocman. “We work so hard to create the home-owning family in Detroit. It’s a shame to have it all lost at the signing of one home-repair loan, or with one’s inability to find a reasonable mortgage.”

While advocates work for local protections, U.S. Rep. Bob Ney, R-Ohio, has introduced a federal bill that would nullify state and local laws designed to protect borrowers from predatory lending.

Wild, wild Midwest

Local activists are swamped with calls from people losing their homes to high-cost mortgages. Winslow, director of the local branch of ACORN, says he’s trying to help 85 people right now; most can’t stave off foreclosure.

Likewise, Williams, executive director of the Detroit Alliance for Fair Banking, says she’s logged more than 700 complaints of predatory lending with the state in 19 months.

“The phones never stop ringing,” says Williams. “It’s predatory. It’s unfair. It’s immoral. But it’s legal. These companies, they know how to stay right under the radar screen.”

Williams and Winslow lament the lack of regulation. Industry officials acknowledge the reality.

“Show me a predatory lending practice right now, and I’ll show you how it violates state or federal law,” says Murray Brown, spokesman for the Michigan Mortgage Lenders Association, and former 20-year employee of the state finance commission. “The laws aren’t being enforced as they should be.”

Last year, the Legislature allocated $1 million to supplement state enforcement, but the money hasn’t been spent, says Penny Davis, spokeswoman for the state finance comission. The federal Office of Thrift Supervision, part of the U.S. Treasury Department, is responsible for enforcing federal banking laws, but Detroit’s regional office is in Atlanta, and the feds do not actively police on the state level. Last year, the Michigan Legislature gave explicit power to OFIS to enforce federal laws.

“It’s totally the state’s responsibility now,” says Brown.

Not only is enforcement loose, but reporting is inadequate, according to fair banking advocates.

The U.S. Community Reinvestment Act of 1977 requires banks to provide loans to low- and moderate-income families in communities where the banks do business. To prove compliance, the banks report Home Mortgage Disclosure Act data. But the disclosure law has many holes. It does not require lenders to report interest rates and fees charged, among other deficiencies.

“A veil of secrecy shrouds the practices of too many lending institutions,” states the March report of the National Community Reinvestment Coalition. “The current [federal] data renders comprehensive fair lending analysis impossible.”

A recent joint report by HUD and the Department of Treasury agrees, and recommends that the Federal Reserve beef up laws and reporting requirements to help combat predatory lending.

Activists hope Gov. Jennifer Granholm provides leadership on the matter. When she was state attorney general, Granholm attended a predatory lending hearing at Wayne State University Law School and said Michigan was soft when it comes to laws and enforcement. She spoke of a Massachusetts law that prohibits lenders from selling loans that borrowers can’t pay back.

Her spokeswoman, Liz Boyd, says the governor remains concerned about predatory lending, but doesn’t have an action plan yet due to the state’s budget crisis.

Usury discrimination?

Alton B. Gunn is an African-American man who plays golf with his white banker friends who, he says, have no problem calling up a bank and getting loans — despite imperfect credit.

So when Gunn — himself the president of a Detroit mortgage company—went to his bank in November to refinance his $250,000 Rosedale Park home, he figured he’d have no problem. He had “goo-gahs” of money in the bank, he says, and excellent credit ratings.

Gunn wanted to capitalize on lower interest rates, and was not looking to take money out. To his shock, he went through a gantlet.

Gunn says he’d never been late on his five-year-old house note, yet the bank made him produce receipts and records to prove his income. The bank then wanted to set his appraisal at $165,000 — the sum Gunn paid for the house six years ago.

He believes his skin color played a role.

“If that happens to me, I can only imagine what happens to other people,” he says. “I’ve got a college degree … I’m educated. I’m articulate. I achieved honors. I employ 18 people and run nonprofits in the City of Detroit that send kids to college. … What’s wrong with me? I have a permanent suntan.”

He says he had to “pull it all out,” to get his refinancing, which he did.

It’s not racism, but “society in general,” that’s the problem, Gunn says.

Despite his experience, Gunn opposed the Detroit City Council’s ordinance. He says it could have ruined his business, United Equity Alliance Mortgage Company. He says he does a great service in Detroit by selling about 20 sub-prime loans a month. One elderly couple took a trip abroad after cashing in some equity in their home, he says, a trip they could never have afforded otherwise.

“I feel good about what I do for people. I take a lot of pride in it,” Gunn says.

Excessive fees are common in the sub-prime industry, he says. But capping them at 5 percent, as the council intended to do, is no solution, Gunn says.

In Detroit, the average home loan is $60,000, he says. To make such loans profitable, higher than normal fees are needed, he says.

For instance, a 5 percent fee on $60,000 leaves the broker with $3,000. After profit and overhead expenses, such a margin leaves as little as $400 for the loan sales officers, who close about four loans a month.

“It kills the quality, good loan officers,” says Gunn. “It doesn’t work in the urban environment.”

Gunn says the human affliction called greed is the problem.

“The people that gouge their customers, they’re slick. They’re hustlers. They’ll get the money somehow. They’ll do all kinds of scandalous and unethical things.”

Meanwhile, Detroit’s law would hurt “us clean, good-hearted lending companies.”

Gunn believes there are other ways to stop predatory lending. Financial education is paramount, he says. Second, the state should license all loan-sales officers and police their behavior. Currently, the state only licenses and monitors mortgage brokers. Loan officers cut the deals, and directly benefit from charging higher costs, Gunn says.

He estimates there are some 20,000 loan officers in Michigan.

“There are some diabolical people out there,” he says. “Some are diabolical enough to allow loans to get through that should not be allowed to go through. But there’s no cookie-cutter solution for a problem so diverse.”

 

Shop around
Tips for getting a fair mortgage.

Lisa M. Collins is a Metro Times staff writer. E-mail lcollins@metrotimes.com.

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