Equity home loan massachusetts rate

How the government and big banks help second-mortgage companies prey on the poor

Just before the credits roll in the movie Tin Men, a couple of 1960s aluminum-siding salesmen commiserate about losing their licenses to hawk home improvements. A city commission has decided to punish the "tin men" who steal the equity in people's homes through shoddy work and overpriced second mortgages.

"You wanna know what our big crime is?" asks tin man Richard Dreyfuss bitterly. "We're nickel-and-dime guys--just small-time hustlers who got caught because we're hustling nickels and dimes."

In real life, three decades later, tin men are still plying their trade in cities across the United States, and home equity rip-offs are no longer nickel-and-dime stuff. Instead, they're well organized, demographically marketed, and nationally franchised. Second-mortgage companies have raked in billions of dollars by fanning out salesmen to slick-talk inner-city homeowners into signing high-interest loans to repair aging rowhouses, pay off medical bills, or stave off foreclosure.

Hundreds of thousands of homeowners have been victimized in the past decade. Tens of thousands have lost their homes; still more have seen their equity sucked out by exorbitant fees and usurious interest rates charged by predatory mortgage companies. Homeowners make ripe targets because they've spent years building up equity in their homes--and because runaway inflation in real estate values has left them sitting on equity gold mines in spite of their modest incomes. Many are targets because they are old or illiterate. Others are vulnerable simply because they are poor and black; they have nowhere to go for credit because mainstream lenders--the banks and savings and loans that have made the American dream of homeownership possible--are reluctant to lend money to residents of working-class black neighborhoods. With mainstream credit cut off, homeowners desperate for cash turn to second-mortgage companies that charge 20, 30, sometimes even 40 percent annual interest.

How does the scam work? Consider 84-year-old Roland Henry. In 1989, real estate entrepreneurs Kevin Merritt and his assistants spotted Henry through a foreclosure listing service. Merritt, then 29, had been working in the Los Angeles real estate market since he was a teenager and claimed to have accumulated a net worth of $10 million. Henry, who got no further than sixth grade, had bought his home three decades earlier with earnings made by selling homemade tamales on street corners in Watts. By the time Merritt got to him, Henry, nearly blind and confined to a wheelchair because of arthritis, was facing foreclosure on two home-equity loans he had taken out when he purchased what he thought was $180 in carpeting.

Merritt offered to help Henry save his home by giving him yet another loan to pay off his debts to the first two lenders. Henry claimed that Merritt fooled him into signing away his two-bedroom house. Merritt claimed Henry knew exactly what he was signing. A civil jury believed Henry. His family was awarded nearly $1.7 million from Merritt's firm this spring. Henry, however, didn't get to hear the verdict. He died last year.

Last May, Merritt was charged with 32 felonies alleging the theft of equity and homes from poor people. He has also been sued at least 175 times. But Merritt, who denies the charges, is still in business--and an increasingly lucrative business it is.

According to Duff and Phelps Credit Rating Co., home equity lending jumped from $1 billion in 1982 to $100 billion in 1988. And while the second-mortgage industry can be a pretty dirty business, to many mainstream banks and S&Ls, the money to be made from it has proved a great temptation--so great that they've helped maintain the home-equity feeding frenzy by bankrolling the tin men: advancing them money for operating expenses and buying up the loans after the ink dries. For example, a subsidiary of the Fleet Financial Group, New England's largest bank, extended a $7.5 million line of credit to one of the region's most notorious lenders, Resource Financial Group. A study last year found that more than three quarters of the Boston families who borrowed money from Resource were facing foreclosure or had already lost their homes.

Fleet is not alone. While most home-equity loans involve middle- to upper-income borrowers, the low-end market and its tantalizingly high interest rates have attracted the attention of financial institutions from Citibank to Security Pacific to the former Bank of New England. (According to surveys by the Consumer Bankers Association, between 1990 and 1991, the proportion of big banks buying home equity loans on the secondary market jumped from 12.5 to 20.9 percent.) In a way, these large institutions had made the second-mortgage business possible by denying mainstream credit to poor and black homeowners. Today, they're profiting from their prejudice.

What do federal regulators say about all this? The usual response is a variation on the theme "It's not our job." Federal bank officials do nothing to regulate second-mortgage companies (which are not depository institutions) and have shown little interest in the banks' role in the problem. In fact, some regulators have suggested that banks could improve their Community Reinvestment Act ratings--which gauge how well banks provide credit to minority and low-income citizens--by purchasing high-rate second mortgages on the secondary market.

This leaves responsibility for cleaning up the mess with the states, many of which have been less than vigilant about policing the industry. In Massachusetts, for example, second-mortgage companies have generally been permitted to charge whatever interest rate they want, as long as they notify the state attorney general in writing if they intend to charge 20 percent or more. It's a little like saying it's OK to rob a liquor store as long as you've dashed off a note to the cops announcing your intent.

The victims of the new tin men aren't all blameless; often their own errors in judgment have allowed the con artists to take advantage. But most are longtime homeowners who give stability and a sense of community to neighborhoods threatened by unemployment, drugs, and gangs. And they are a population in need of legislative protection every bit as much as middle-class S&L depositors whose losses are covered with taxpayer money. Instead of helping out, government, through deregulation, has left these homeowners as legally powerless as they are politically impotent.

Home cheat home

Before the Rodney King riots, the working-class flatlands of South Central Los Angeles had a check-cashing outlet on corner after corner--Gee Gee Liquor on S. Normandie; Cash Now Inc. on S. Figueroa; Nix Check Cashing on Martin Luther King Jr. Boulevard--133 outlets in South Central alone. These are places that don't take deposits or make loans; they simply cash checks for a fee that ranges from 1 to 21 percent of the check's value. Some check-cashing outlets set up mobile offices at public housing projects on the first and fifteenth of each month to cash tenants' government aid checks.

What you won't find in this neighborhood are a lot of banks or S&Ls. There are only 19 in this slice of southern L.A., an area that's home to more than half a million people. The majority of residents are black or hispanic with low or moderate incomes--not the kind of customers banks like to court. With few mainstream banks to turn to, these residents often are without savings accounts and fail to develop the kind of longterm relationship with a bank that is needed to get a loan. Yet many of these residents have at least one valuable asset--one of the thousands of modest, two-bedroom homes built after World War II when veterans poured in to take jobs in factories and nearby shipyards. In the early sixties, a small house with a picket fence cost around $7,000. Today it might be worth $150,000.

The property-rich but credit-starved homeowners are easy targets for second-mortgage companies. Their salespeople use reverse phone directories (which list residents by address) or canvass door-to-door in targeted zip codes. Attorneys say some salesmen cruise these neighborhoods, spot likely houses, and use their car phones to call their offices, which then tap into real estate databases to see whether the owner is a promising mark. The salesman finds out what product a homeowner wants, such as a satellite dish, then sells it to him on credit, securing the loan with a second mortgage on the house. The dizzying paperwork that accompanies mortgage applications makes it easy to mislead someone who's financially unsophisticated. There's a slogan sometimes used in the business: "Cash out the deal before the customer comes out from under the ether."