Everywhere you go, advocacy groups are urging stricter laws on non-conforming 2nd mortgages and home equity loans. Sub-prime mortgages are likely to be more costly than “A -paper” loans, but they are intended for borrowers who pose a greater risk to lenders. In most cases they are considered non-conforming because of the lack of credit or past credit problems.
California’s new laws, AB 489 and AB 344, became effective July 1, 2002. They apply to a mortgage or deed of trust with a loan balance of no more than $250,000. The protections provided by the laws are triggered if the annual percentage rate of the loan is more than eight percentage points over the yield on Treasury securities, or if the total points and fees payable by the consumer exceed six percent of the total loan amount. Thus, there is a 5.99% max in fees. (i.e., $35,000 second mortgage in CA is restricted to 5.99% of loan amount = $2,096 for APR affecting fees. Maximum APR for a 15 year 2nd mortgage in August in CA is 13.10%, and for the rest of the nation its 15.07%.
What is happening is that people in California are being rejected for 125% second mortgages and sub-prime home equity loans because the State of California thinks that they can’t make financial decisions on their own. And, some groups continue to feel the need for legislation further tightening the provisions of AB 489 which would make it even more difficult for California homeowners to use their home equity to secure loans.
If California homeowners want to consolidate credit card debt that they are paying 20% a month for, they should be able to consolidate the debt into a second mortgage. Interest rates are driven by market conditions, and credit risks determined by the lenders. CA should follow suit with the rest of the nation.
Excessive anti-predatory lending laws can hurt legitimate lenders and the consumers they serve. For example, sub-prime loans do help people with poor FICO scores by extending debt consolidation refinancing and second mortgage loans to pay off high-interest debts. Also, sub-prime loans are legitimately extended to borrowers with good credit who are self-employed or who have unpredictable incomes.
By: Maria Ny