Three Lender Practices Driving Americans Into Foreclosure

July 21st, 2010 by Reed Allmand

The foreclosure crisis has continued and for many Americans it seems that it is only getting worse.  But what started the foreclosure crisis and how can we avoid this type of catastrophe in the future?  Below are three banking practices that are driving Americans into foreclosure:

1. Lender dishonesty is driving Americans into foreclosure.  Many borrowers signed up for adjustable rate mortgages and were misled about what their payments could look like if and when the mortgage interest rate increased.  Because those borrowers were not prepared for the “sticker shock” of their interest rate increase, many were driven into foreclosure.
2. Many unscrupulous lenders steered borrowers into costly loans when they could have qualified for much cheaper ones.  This practice alone fueled the massive amount of foreclosures in the subprime lending industry that put many low-income homeowners out of their homes. If the lenders had not been allowed to steer these borrowers into costly loans that they could not afford, we may have avoided the foreclosure crisis or at least avoided a foreclosure crisis of this severity.
3. Many lenders knowingly put borrowers (both low income and moderate income) into loans that they knew those individuals could not afford.  For those borrowers who signed up for loans they couldn’t afford, foreclosure was not just a possibility, it was inevitable.  There needs to be stiff penalties for any lender that puts a borrower into an unaffordable loan.  Lenders have a fiduciary duty to make sure that the borrower can afford the loan and that the creditor financing the loan can avoid needing to retake the home via foreclosure.