Right now we are experiencing a melt-down in County real estate values. This is being fueled mainly by the epidemic of foreclosures that are occurring daily. The foreclosures are pushing prices to lows that nobody expected. Hundred of Sonoma County residents purchased property with sub-prime loans and are now subject to foreclosure. As much as 20% of all recent sales in Sonoma County were a result of foreclosures. As much as 10% of all property today is worth less than the money borrowed against it.
“Predatory Loans”
Many of loans being foreclosed on are being called “predatory” because they were made to people that could not afford them. Mortgage brokers have a duty not to loan money to borrowers that have no apparent present ability to pay for the loan. It is a breach of a duty to the borrower to make a loan to a person that has not established an ability to pay. However, on the other hand the broker is entitled to rely on financial statements of the borrower as to stream of income.
In some cases predatory loans can be rescinded. For example, if the lender charged brokerage fees and costs that exceed the legal limit the borrower will have limited rights to rescind the loan. Each case depends on its specific facts and requires a study of the finance documents. If the loan cannot be canceled or rescinded then the borrower must consider other options. In some cases borrowers may be worried whether the bank can collect the debt from properties other than the one mortgaged. These answers require individual consultations.
Help After A Predatory Loan
Real estate finance issues arise both out of state laws such as the Finance Code and the Business and Professions Code as well as federal laws such as the Truth In Lending Act (TILA), Regulation Z, and Real Estate Settlement Procedures Act, (RESPA) to name a few. However, some of the real estate law that attorneys deal with on a daily basis are rules that come from court decisions. The language in the real estate laws are further defined as disputes arise and are handled in the courts. Each dispute raises specific issues that have to be interpreted with respect to how the laws are to be applied. These laws evolve over time because one judge may overrule a former decision.
From Sebastopol, the Law Offices of Graden Tapley represents clients throughout Sonoma County, including Santa Rosa, Cotati, Healdsburg, Petaluma, Rohnert Park, Santa Rosa, and Windsor.
Thought I’d comment on this article. In Ontario (Canada), we did have some similar products but the specifics were typically for self employed people who were writing their income down to save on income tax. But the problem here can’t be be put squarely on the shoulders of the mortgage broker. Yes, there are some highly aggressive mortgage brokers, but let’s not forget that these products were established by the lender to attract a certain clientele. If the client that is sitting in the broker’s office fits the guidelines provided, then as long as the risk to benefit ratio is explained to the client, then the loan can be processed with the proper documentation….just may 2 cents worth.
I agree. And get this. Under the California Financial Code (Div. 1.6) a mortgage broker is not allowed to arrange a loan to a consumer secured by the consumer’s home unless the broker reasonably believes that the consumer can service the loan based on a “consideration of the [consumer's] income, obligations, employment status, and other financial resources.”
But, this duty prohibition does not apply unless the percentage rate on the loan will exceed by more than 8% the yeild on treasury bonds having a comparable term. You calculate the loan rate at the time the loan is taken out- not when it “explodes” to a higher interest rate after 5 years. A 30 year treasury bond is at least 2.5% so adding 8% to that means that unless the mortgage was 10.5% the broker has no duty to consider the consumer’s finances when arranging a loan, at least not under California statutes.
I have yet to see a loan that was 10.5% when it was taken out. In fact, I have yet to see a consumer situation where the consumer was able to benefit from the Truth In Lending Act. The bottom line is that the borrower is only able to rescind a loan if the borrower can pay the loan amount back to the lender. Only when this happens does the lender have a duty to let the borrower out of the loan and pay the borrower back all the interest and fees. The borrower can only do this by refinancing with another loan. The problem is that the property values have all decreased. No bank is going to loan money on a property that is worth less than the original loan.