Some of these actions are only predatory when the borrower is unaware of the consequences. Many of these loans were originally designed for more sophisticated borrowers who knew of the consequences.

Predatory mortgages are in the news all the time now because many mortgage companies decided to increase business and use these sophisticated techniques on borrowers who were not qualified to purchase a house. As long as home prices are rising and interest rates are low, most homeowners do not notice the problem; they can always refinance. With the downturn in many real estate markets and rising interest rates, homeowners are now facing the realities of these mortgages.

Negative Amortization

Negative amortization is a type of loan where the loan balance increases every month instead of decreasing. This is not always bad as some sophisticated investors can use this to their advantage in a rising real estate market.

High Interest Rates

Some mortgage lenders will target certain ethnic groups or certain neighborhoods. Usually they prey on first-time buyers who do not have good credit and do not have enough income to pay the mortgage. This leads to the mortgage holder losing the property or maybe refinancing again, this is called loan flipping.

Asset Based Lending

This occurs when a mortgage company lends money based on the total assets of the borrower. The mortgage company does not take into account the borrowers income or ability to pay the loan back. This is always bad and should not be confused with no-doc loans in which the borrower is stating their income.

Balloon Payments

Sometimes mortgage lenders will talk about loans being 30 due in 5 or 40 due in 10. These are called balloon loans and the first number is the term that the loan is based on for payment. The second number describes the ?balloon payment?, or due date of the loan. In the first example, the loan is ?due in full? five years from the date the loan was made.

Again, these types of loans, like interest only loans, are not always bad. Used properly a smart investor in a rising market can conserve capital and buy more properties.

Interest Only Loans

Home loans that only require the interest portion of the loan paid are also a potential problem. The principal is never paid down so in a level or declining market there is a potential to be ?upside down? or owe more on the house than the house is worth. This is a serious problem when the original mortgage was with no money down.

These are just some of the mortgage lending pitfalls to watch for. The US Department of Housing and Urban Development has more information and a good article on loan fraud at the HUD website. Another place to look for laws on the books in your state is on the National Conference of State Legislators website. There is a list of states and what predatory lending practices are outlawed.