The guiding principle of the nonprofit Habitat for Humanity, founded in 1976 to build affordable houses for underprivileged families, comes from the Old Testament: "If a brother living near you becomes poor, you must provide for him...do not make a profit on the goods you sell him." But that ethos doesn't carry over to the many banks, brokers, and mortgage servicing companies that deal with Habitat families and, increasingly, are profiting handsomely from the financially naive.
Consider it another consequence of the housing boom. Habitat families are able to buy their homes for much less than full market value. A decade of rising prices has made them wealthier--on paper. At the same time, many are strapped for cash and unsophisticated about credit. For freewheeling brokers and lenders eager for refinancing business, the combination couldn't be better. "Habitat borrowers have targets on their backs," says Michael Calhoun, president of the Durham, N.C. Center for Responsible Lending.
Charles and Ann Williams of St. Paul, Minn., are prime examples. He's a janitor, she's a home child-care provider, and they have three children. Their annual income is $18,187, supplemented by Social Security benefits. In 1995 they built a Habitat house and took a $64,000 mortgage. Since all original mortgages in the Habitat program are interest-free, their monthly payment was just $396.
That changed last year. A flyer advertising an offer to refinance with New Century Financial Corp. in Irvine, Calif., looked tempting. Within three weeks the couple signed papers. The good news was that they were able to unlock $28,000 in equity, money they used to cover debts. But their new $81,000 loan carries an interest rate of 9% and payments of $872 a month, more than half their monthly income. And the loan's adjustable rate can jump to 16% in two years. New Century says it has policies to ensure borrowers know what they're getting into and that it is negotiating with the couple for a new loan on better terms. The Williamses declined comment.
Many other families are being bombarded with offers to refinance out of 0% loans. Jordan Ash, director of the Financial Justice Center at the Association of Community Organizations for Reform Now, an advocacy group, says lenders are targeting Habitat families with phone calls, mailings, and even personal visits. Habitat affiliates in Indianapolis and Columbus, Ohio, say many clients are getting mail solicitations that look to be from Habitat but are not. "I probably get two phone calls a week," says Dawn Daniels-McNear of the Columbus affiliate.
Famously championed by emissary Jimmy Carter, Habitat is a $145 million-a-year enterprise based in Americus, Ga., with about 2,300 affiliates in some 100 countries and all 50 states. It builds nearly 25,000 homes a year for people who earn 25% to 50% of their area's median income. Applicants contribute about 10 weeks of labor to build their home or others in the community, make a downpayment of $100, and commit to a monthly mortgage payment.
Habitat's focus is mainly on building. Most of the mortgage payments it collects go into a pool to fund more houses. But Habitat also sells scores of loans to banks and outsources to mortgage servicers, some of which impose draconian penalties if people fall behind. They "jam predatory costs and attorney's fees and interest at 18% into the debt," complains April Carrie Charney, a lawyer with Jacksonville Area Legal Aid Inc. in Jacksonville, Fla.
One of Charney's clients is Yolanda Ray Cotton, who bought a home in 2000. When she slipped on payments, the loan's servicer, EverBank Financial Corp., quickly raised fees and threatened foreclosure. Cotton refinanced with Option One Mortgage Corp., a unit of H&R Block Inc. specializing in loans to borrowers with poor credit. Now she's behind on that loan, has racked up $9,925.65 in penalties, and is fighting to stave off foreclosure, says Charney. Cotton declined to comment. Option One says it is investigating the loan and will offer remedies if appropriate.
Critics say Habitat, which is made up of autonomous affiliates, isn't set up to deal with homeowners' problems. In many cases, "Habitat makes the loan, and they're out of the picture," says Charney. Spokesman Duane Bates says Habitat is aware of the problems with predatory lenders and servicers but doesn't consider them widespread. He notes that foreclosures are rare, with the national rate under 2%. And he says Habitat offers education and training to help owners make better choices.
Habitat also says it's beefing up borrower protections. Some newer loans require homeowners give Habitat the right of first refusal to buy the house for the amount paid in. Others stipulate that owners can collect only a percentage of the profit from a sale or refinancing based on how long they've lived there; the rest goes back to Habitat.
Even so, refis still tempt families who don't realize how fast the fees and interest add up. "You can't get a better deal than 0%. There's absolutely no reason to refinance," says Chris Miller, senior vice-president for loan servicing at NovaStar Financial Inc. in Kansas City, Mo. The firm has launched a pilot program with Habitat to provide mortgage servicing, job counseling, and credit education for free. Miller says many customers come for advice about refinancing, unschooled in the basics and unaware that they currently pay no interest. He says his team dissuades only 35% of them from refinancing. "Lenders are taking advantage of them," Miller says. "It defeats the entire purpose of the program."