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Perhaps you saw my sign reading “City of Berkeley: Hands Off My Equity!” and “It's the Disclosure Stupid—First-Time Homebuyers Assistance Program is a Predatory Loan!” during the last city council session. I was voicing indignation at the silence of city government to questions about deceptive lending practices perpetrated within the former Berkeley program entitled First-Time Homebuyers Assistance Program, wherein 29 West Berkeley first-time homebuyers unwittingly handed the city a blank check to the equity accrued in their homes. Only now is the city admitting that these loans are investments, and also not the assistance they purport to be.  

Over the past six years, the city of Berkeley has been clandestinely siphoning off nearly half a million dollars of our equity. The city has unduly profited by omitting accurate and timely disclosures of bewildering loan terms to financially unsophisticated, gullible first-time homebuyers. These predatory lending tactics are known in banking circles as contract knavery and price gouging, and usually are inflicted upon underserved minority communities. This practice makes a mockery of the meaning of “assistance.”  

As in this case, unscrupulous lenders devise a loan with a hidden profit incentive wrapped in altruistic packaging that claims to be for the benefit of the borrower. We FHAP homebuyers were led to believe that the city’s high-cost secret investment loans were low-cost financing assistance for low-income families.  

Ordinarily when taking out mortgages, borrowers receive full disclosure within a few days of application—this is in accordance with state and federal laws that are meant to assist consumers in evaluating the complex credit terms involved. None of those laws appear to have been followed during the city of Berkeley's first-time homebuyers' program, which greatly contributed to the confusion of the borrowers, allowing the city to secure its lucrative equity-grabbing deal.  

When I participated in the program, I did not receive the loan terms until the close of escrow. Buried in a thick stack of legal documents were predatory terms the city never disclosed during its buyer education sessions. Included among the onerous clauses, I discovered later, were those requiring surprise future balloon payments from by then elderly owners who will have finally paid off their first mortgage after 30 years. Based on their loans’ historic performances, the city could easily demand hundreds of thousands of dollars from them by then.  

This belated disclosure deprived me of any opportunity to evaluate the terms privately, with counsel, prior to having to sign the loan. Given the amount of disclosure the city claims occurred, it’s remarkable that none of it exists today. Clearly the city’s disclosures do not meet professional standards of lending procedure and government accountability. It is also clear that at a time of historically low mortgage rates and rising equity, the city concocted these loans to bring a much higher return than simple interest alone would bear, but nowhere is the loan described as an investment. No information was offered regarding equity going up 150 percent in Berkeley every decade for the last 30 years (according to the city’s own data), or that city staff was monitoring these equity increases throughout the program. One family, for example, currently owes $81,000 for their five-year-old $20,000 FHAP loan. This is more than half the home’s $140,000 purchase price, scoring the city a hefty 400 percent profit, since the principal loan came from a HUD grant that cost the city nothing! My own $20,000 FHAP loan skyrocketed to $50,000 within four years’ time, amounting to a usurious 44 percent yearly interest rate.  

Berkeley’s FHAP loans continue to balloon—perhaps as high as 30 times over the cost of market-rate financing—all the while hiding their high cost. These balloon payments will most certainly lead to the loss of our houses in order to pay off these Draconian city loans. Housing Director Stephen Barton, Acting City Manager Phil Kamlarz and others in Berkeley city government are quick to assert, “All of the applicants were fully informed of all of the terms and conditions of the loan.” Relying entirely on staff assertions that cannot be verified independently, they offer a long-winded story of how borrowers supposedly were verbally disclosed repeatedly. However, it is evident that the disclosure was inadequate based on the city’s sizeable profits. Common sense supports that cognizant borrowers would not willingly have overpaid by up to four times the loan amount, unless systemic comprehension problems existed about the city’s terms.  

Unlike some first-time buyer programs where participants are helped with securing primary financing, credit repair, home repair, and locating a home, the city’s program was only available to those with resources already. Mr. Kamlarz writes in his report to the city council, “The goal of the program was to help low-income buyers who could not otherwise afford to do so to purchase their first home.” However, the program was only available to borrowers with “a clear credit history”, who were required to “obtain a mortgage loan from a private commercial lender” for the full purchase price of the home, minus the $20,000 HUD-financed loan. It was the borrowers who were considered a safe bet—with credit good enough for professional bank underwriters to be comfortable lending them up to $180,000, and who made down payments of up to $43,000—that were victimized under this program. Since the repayment amount is based on the current house price and not the owner’s original contribution, our down payments have also gone to the city.  

In response to inquiries regarding this unjust and problematic program, the city has chosen to dismiss us as ungrateful, disparaging homeowners, adding insult to injury. Berkeley’s FHAP borrowers were not destitute people, as Mr. Kamlarz implies, but simply low-income families seeking to purchase homes. Even without the city’s involvement, such high-qualified borrowers most assuredly could have obtained the $20,000 at drastically less cost than the 200-400 percent returns the city demands.  

The City of Berkeley’s profits are grossly out of proportion to its funding assistance. We call upon the compassionate citizens of Berkeley to demand accountability from city government. Please contact your councilmember and the mayor and tell them that predatory lending has no home in Berkeley. Further information can be obtained by e-mailing to fhap@pacbell.net, or by calling 757-5401. We need your help in bringing an end to the city of Berkeley’s First-Time Homebuyers Assistance Program that has kidnapped and held for ransom our dreams of homeownership, turning our American dream into a nightmare.  

Kent Brown is a longtime Berkeley resident.