Sunday, October 12, 2008

Mortgage Fraud: A Two-Way Street


I am currently representing a dozen or so clients, who borrowed money, mainly through mortgage brokers, and cannot continue to pay back the debt. In some, in fact most, of the cases, the mortgage broker or lender sold the borrower one thing, and delivered something else. But there are cases where the borrower knows the deal and proceeds anyway, through misplaced faith in the ever-increasing market price, the mortgage broker being his friend, or simple greed to be worried about when it comes time to worry. WE ARE THERE!!!

Two quick examples:
Bad Lender
1. Borrower has a credit score into the mid 700s. She is a "prime", not sub-prime, borrower. The broker she goes to is creative. He eliminates certain rent received by the borrower in the other portion of her house, and tells her that she qualifies for an Adjustable Rate Mortgage ("ARM") with a starting rate of 6.625%. Her rate will be fixed at the 6.625% for 2 years and then will change periodically for the rest of the term. He goes on to tell her that the rate will go up and down every now and then like the prime rate does. The Truth-In-Lending Disclosure ("TIL") required under the law to be given to a borrower both before and during the closing confirms the assertion of the broker. In fact, it shows 24 monthly payments of $1,117 and 336 payments of $1,159. This dollar amount increase translate to a rate hike of only .375%, making her maximum rate of interest 7%.

Unfortunately for my client she bought a 2/28 6 month LIBOR¹ loan. This means that after the first 24 months, the rate will change, the first time a maximum of 3%, and then will change every 6 months. The formula for the change is the London Inter Bank Offering Rate (LIBOR) PLUS a margin. That is set by the lender to determine its profit. A reasonable margin is 2%-2 1/2%. My clients margin is 5.875% . The LIBOR was at 5.3215%. Combine the 2 and you have the potential rate of 11.1875% and payments of $1,705.90. This is an increase of $588 or 52.7%Luckily, the 3% maximum over the original start rate took over. But after 6 more months, the rate moved up again by 1% and was at the 11% mark.

What was affordable for my client no longer is, due to the huge increase in payments - 52%!! She wanted the house and signed where the lender's attorney told her to sign. She didn't even know what questions to ask. Her mortgage broker was at the closing as she believed that if he thought the loan was okay for her, then it must be fine.

My client missed two critical points - she did not question what an adjustable loan was by insisting that the broker explain it in depth, and she did not have an attorney working for her, or at least with the mindset that he/she had to explain all of the terms to my client. In my client's defense, the TIL looked fine - a one time $42 adjustment for the term of the loan.

Is the lender responsible to fix the financial mess? I believe YES and am in negotiations with the lender now to try to prevent a foreclosure.

Bad Borrower
2. This second example is a situation quite different. The borrower, a prospective client, took a loan that had a low teaser rate, a rate that was good for a month/year/3 months etc. This particular loan had a provision like the one I detailed in an earlier post, where the payment stayed the same but the rate moved the second month. After the first year, the borrower owed more than he/she borrowed because the payment as based on a very low (2%) teaser, while the actual interest rate that determined the amount that was owed each month, changed to a standard market rate the second month.

Was this client told of the hazards? NO!! HOWEVER, this is the 13th refinance in 25 years. It will be difficult to convince anyone that the borrower was not sufficiently sophisticated to either understand the terms or hire an attorney to advise him/her. In similar cases I have seen that the borrower has inflated his/her income, or assets, or.... whatever makes the loan get approved.

In the first scenario, the lender is totally at fault, perhaps through the broker but certainly there is no fault on the part of the borrower except naivete. In the second situation, the borrower knew or should have known what he/she was getting into, or should have known that he/she needed professional help to explain the terms. This is why I call this a two-way street.

In the vast majority of cases I review, the broker, lender, servicer, etc has taken advantage of the borrowers ignorance, naivete, or even arrogance. The borrower, unless well-versed in mortgages has not a prayer of getting a good deal if the lender etc is not totally honest and committed to Good Faith and Fair Dealing.

The next post will delve into the "bailout" and its ever changing character, and WHY YOU NEED AN ATTORNEY to advise you, especially if you believe you have a "bad" loan.

¹ [It is an average of the interest rate on dollar-denominated deposits, also known as Eurodollars, traded between banks in London. The Eurodollar market is a major component of the International financial market. The 6 month LIBOR rate is normally 1/2%-3/4% above the 1 year Treasury bill rate which is the other rate that could be used. They usually move at the same pace although the LIBOR is more volatile.]
authors copyright by Richard I. Isacoff, Esq 2008

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