Money Coach: Avoid Get-Rich-Quick Schemes

MICHEL MARTIN, host:

Now it's time for the Money Coach, where we check in with our personal finance guru, Alvin Hall.

You see them everywhere, tacked on utility poles, flyers at the barbershop - ads for get-rich-quick schemes that promised little effort, little money down, and huge financial rewards. But you know they rarely go that way, and if they do, please be sure to visit our blog and tell us how. But we've noticed that many of these schemes seem to be relying on something personal to get people involved - race, ethnicity or even religion.

I'm joined by Alvin Hall to talk more about money scams and who's most at risk. Welcome, Alvin.

ALVIN HALL: Thank you. I'm glad to be here.

MARTIN: When we think about get-rich-quick schemes, what are typical?

HALL: Typical is somebody who lives in the community who decides, dress well, to have all their accouterments of success: suits, the hats, the cars. And they show up and they're always flashing a lot of cash. And they come in and they say, you know, you can be rich, too, if you just come and work with me on this scheme to release the money from people's mortgages. In most of these communities, a lot of people bought their houses a long time ago. And this is their major asset. And they start preying on these people.

MARTIN: So the idea - I think that people have this traditional concept that these schemes involve sort of investments offshore, and what you're saying is it's actually a lot more mundane. It's actually things that people would never think are schemes in fact are, and a lot of those involved mortgages.

HALL: Exactly, because typically, the people will tell you we can help you pull cash out of your house. We can help you get cash that you need to do this with, to travel with, and it involves these elaborate schemes where they pull fees off your mortgage. It's always within the realm of possibility.

MARTIN: Now there's an article in the Times today which I'm sure you saw, that said that - it was an analysis by NYU's Furman Center for Real Estate and Urban Policy. And it said that homebuyers in predominantly black and Hispanic neighborhoods in New York City, were far more likely to get their mortgages from some prime lenders…

HALL: Yeah.

MARTIN: …than homebuyers in white neighborhoods, even though they had similar income levels. Now there are a lot of questions. People said, well, gee, you know, are they - do they have comparable credit? And do they have comparable, you know, other sort of profiles except for their income? But the question I have for you is, do you think that these lenders are specifically targeting African-American and Latino homeowners with these offers for these subprime loans? Or is it a - or what? Is it that black and Latino buyers are drawn to this more for whatever reason?

HALL: I think it's the last vestiges of racism in housing, if you want my honest opinion. I think they target these people because they know that black and Latino people have a slight suspicion of mainstream financial institutions, and they want a comfort level. So these people sell to that comfort level. I have friends to whom this has happened. One friend, it was his wife's best friend's nephew who sold them a subprime mortgage in which the interest rate jumped up almost three points after one month - after one month. It's just shocking. But they sell to comfort level. Now if you look at white communities, they have the same education level. They have the same suspicion, but people treat them differently because they don't want to, in essence, prey on those people.

MARTIN: What, then, are some red flags that people should look out for? Because what I hear you saying is that this isn't - you know, it may be obvious to you, who is financially savvy, that these kinds of things are schemes and that they're not in your best interest. But if you're a person who doesn't have a lot of sort of a financial literacy, and if you are being approached by people who are in your social circle, you know, people who you know from church or from the neighborhood, how do you screen the wheat from the chaffe?

HALL: I think there's a real simple principle: keep it simple, stupid. Money is not magical. You can't create free money out of nowhere. If you have a fixed rate mortgage and you're paying off that mortgage every month and you don't need that money, then leave the mortgage the way it is.

As soon as somebody starts telling you they can release mortgage in your - money from mortgage, they can help you make your dreams come true, all you have to do is sign on the dotted line and you get the sheet of paper that you don't understand, stop your self. Hand the papers back to them, get up, smile and say thank you but no thank you, and walk out the door. But these guys are really good at selling to your dream.

I call the people who sell these mortgages sort of the next level of bling salesman. You have the guys in the rap videos doing one thing, right, dressing up with big watches, the big symbols, the clothing. Then you have these guys who put on the suits, the ties, drive the right cars, and it seems possible. But you, the individual, needs to say I don't need to pull money out of this unless I go back to a bank who can explain this to me.

MARTIN: So keep it simple?

Mr. HALL: Keep it simple.

MARTIN: Okay. Alvin Hall is our financial expert. He joined us from his home office in New York. Alvin, thanks so much.

HALL: Thank you.

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