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Politicians and pundits like to decry predatory lending, the practice of private banks and credit card companies preying on poor and vulnerable people. Indeed a new federal agency, the Consumer Financial Protection Bureau, was recently established to ride herd on private lenders. As Brad Branan of the Sacramento Bee shows, the worst offenders would be hard pressed to top the government of California.
During the 1980s, California’s Department of Housing and Community Development launched the California Home Ownership Assistance Program, which approved 345 loans at interest rates in the neighborhood of 12 percent. This deal also deploys an “equity share” demand for homeowners “to pay as much as half of the amount a house has appreciated since its purchase.” As Branan explains, “the payments can be quite high.”
The state Department of Housing and Community Development wrote to Robert Frugoli, 55, of Sacramento, demanding “full payment” for the prefabricated house he bought for $58,500 nearly 30 years ago, and on which he had faithfully made payments. The Department told Frugoli to hire an appraiser to peg the property’s value, now some $140,000. So Frugoli, in poor health and living on a disability payment of $1,800 a month, would owe the state of California $40,000. Frugoli and other embattled homeowners say they did not understand the equity-share provision and would not have signed the deal if they had.
Maziar Movassaghi, assistant deputy director at the California Department of Housing and Community Development, told Branan that he and other department bosses don’t understand how the program came about. It was discontinued long ago and only about 10 percent of 345 loans are still active, but bureaucrats are still coming after the low-income homeowners. Their likely solution is to refinance their loans so they can make payments that won’t exceed one-third of their income.
A double-digit interest rate plus a balloon payment of half the appreciated value of the property. By any standard, that is predatory lending. As low-income homeowners are learning, when government claims to help there’s always a catch.