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The Magical Mystery Mortgage: Loans Gone Wild

posted by Nathalie Martin

This site has had some fabulous posts about mortgage fees in Chapter 13 and mortgage services fraud. This is a short story about mortgage fees or funky interest rates, or perhaps just plain old fraud, in the context of the stripdown of a mobile home. Many of us know about negative amortization mortgages, ARMs that adjust up when the rate goes up, ARMs that adjust up no matter what happens, 2/28s, and a host of other exotics. I think, however, I have discovered a new type, one that has the same principal balance no matter how much money the borrower pays on the loan. I call it the magical mystery mortgage.

A client in our Southwest Indian Law Clinic had previously filed a Chapter 13, stripped down the mortgage on his mobile home from $28,570 to $12,000, paid $9,000 in principal toward the $12,000, then defaulted. The case was ultimately dismissed and the mortgage company (we'll call it "Voldemort Mortgage," just for fun) came back with a vengeance, threatening repossession or foreclosure, etc. We entered the case and were acknowledged by the mortgage company as the attorneys for the borrower. We then attempted to get Voldemort to take what was left on the bankruptcy payments, rather than insisting on the full pre-bankruptcy loan amount. They agreed, so we thought. In exchange for an extension, the client agreed to pay $1,400 up front and the remaining $1,600 over a period of roughly five months.

Before the terms were memorialized, however, Voldemort sent a loan extension agreement directly to the client for his signature, without first providing it to us for review. I go into all this just so you can see what goes on. It is not pretty. The loan extension agreement did not reflect the terms of the agreement as verbally explained to the client. Instead it set the balance of the loan due at $28,570, not the $3,000 we had negotiated. We only discovered that the new agreement did not reflect the oral agreement, after Voldemort presented it to our client for his signature. Oddly the balance due, the $28,570, supposedly took into account the bankruptcy payments and a $1400 payment made by the client at the time of execution of this agreement. The client then made yet another payment of $800. The new balance? You guessed it…..$28,570.

We called Voldemort, and the student and I and finally reached someone in the bankruptcy department. The conversation went something like this.

Student attorney: We do not appreciate that you scared our client into signing something without our consent when you knew we represented him. You should never contact him directly. You know that right?

Silence.

Student attorney: We are really calling to find out how all the various payments have been applied. Starting out with the $9,000 paid during the bankruptcy….how was that applied? The principal seems not to have moved a penny (literally).

Voldemort: We bought these loans from Chase and they are so tricky. The borrowers have to make the payments in 30 day increments and if they don’t, say they pay on the first and a month is 31 days, the interest rate just skyrockets. Yeah…these are designed to trip people up and they do. It is hard to get ahead with these.

Student attorney: But how was the $9,000 applied?

Voldemort: To the interest. See…the trustee in the bankruptcy did not comply with the 30 day rule and the interest rate just went crazy during the bankruptcy.

Student attorney: Is this the bankruptcy department?

[my sentiments exactly. Since this is a stripdown or cramdown, the trustee clearly need not pay under this funky system…surely we had reached the Chinese culture department instead, right?]

Voldemort: Yes, this department processes all bankruptcies, why?

[explanation of the chapter 13 rules for stripping down loans, which were clearly as much as a mystery to this person as the principal calculations].

Student Attorney: We just want to know why the principal balance does not ever change. Please forward us all the loan documents and the payment history so we can see how this works.

Voldemort: Ok, but seriously, I told you why. Interest. Super-high interest. The rate is just so high, so high it is amazing, isn’t it?

Student Attorney: Amazing.

Niceties are exchanged and the conversation ends. So far, no papers explaining all this. I will keep you posted. This just confirms what you already know, namely that there are some very odd things going on in the mortgage world.  Only a tiny fraction of them end up in bankruptcy. The rest are hidden from view. Call this high interest, or whatever you want. I am tempted to just call it not applying the payments to the loan. Is this legal? I assume no, but given the absolute lack of regulation of these things, it is possible that it is. Consumers can’t fight this kind of thing, at least without an attorney, something few in this boat can afford.

Comments

Ya???? Get this! I just came by a Relief from Stay today where the debtor has been paying 20 of 30 years on the Mortgage note and the principal only dropped $10k! (as far as the Relief from Stay said anyway) This is not one of those "exotics" either. Uhhhhgggg this is going to get ugly!

What’s cool here in this district is that the Mortgage is passed thru the chapter 13 trustee and she does these "periodic report to mortgage imposing a bar date for asserting a claim for post-petition charges accruing on the residential mortgage" and the bar date had just run its course prior to them filing the “RFStay”. I think this is going to save the debtor a lot of heartache in this case. It’s actually going to be the determining factor in the debtor staying in the home. The “Notice” is providing a base for calculations of mortgage arrears (if any). I am already poking holes (more like gapping wounds) in their pay history. (Thanks Katie and fellow bloggers for their insights on servicing mishaps) I can’t wait to hear the explanation on this one.

Patches, pull the PSA on the case if the loan has been securitized. Spreadsheet the monthly payments. Get a CPA/CFE or Forensic Accountant involved if at all possible. 20 years worth of equity should be worth the expense.

Compare the terms of the mortgage with any fees charged i.e. force placed insurance, BPOs, interest on corp. advances, "misc" fees, etc. Do a little background on any and all "vendors" involved. You may very well find ties between one or more of them potentially creating "conflict/conspiracy" issues. The more money note holders and/or servicers can keep in-house or "in the family" the more money they all make. Who owns the note? Who owns the servicer of the note? Who's the trustee? Who is the underwriter of the FPI if FPI is involved? Example: Balboa Insurance is a force placed insurance vendor. Balboa is owned by Countrywide - at least it was the last time I checked.

Are the plaintiffs still paying on pmi? Who is the pmi provider? If they are still paying, why wasn't pmi removed X years ago when they hit the 20% equity trigger? Any chance that the pmi provider at one time owned the servicer? Play "six degrees" with each and every entity involved. You may be surprised at some of the connections. Kevin Bacon most likely will not show up in the analysis though... ;)

THanks MIKE! Im going thru that stuff as we speak. Tracking down everyone is going to be hard right now as I don't have the assig. history yet. But I'm getting there. Right now these guys are only giving me a pay history since 2006 but I am asking for a full history. Will "E" you if I get lost at the FTC and SEC web sites. No PMI as far as I can tell but I do not have a proper pay history.... YET. I was a little off the principal was reduced by $8,065.75 in 19.5 years!

Thought you'd all be interested that Yves over at Naked Capitalism picked up this thread...

http://www.nakedcapitalism.com/2008/05/voldemort-mortgage-and-its-magical.html

They withdrew! Ohhh well. Great for the debtor though. Would have liked to have seen something on this one but a win is a win.

This story reflects in any loan that is daily simple interest. The US Treasury charges Daily simple interest for all loans and IRS debts owed in this country and most car loans are Daily simple interest. The terms of the note would have read that the payments would be applied first to interest from the date of the last payment etc... Also, just to educate you... All lines of credit are calculated on Daily simple interest. Also, all of those 'equity builder' loans are daily simple interest. What this means to the homeowner is that if they make Two 1/2 pmts per month, or a 1/2 payment every other friday they can cut up to 8 years off of the 30 year note, and decrease the interest paid on the loan by a huge margin. Just because a minimum wage employee said something incorrect, doesn't mean it was accurate. Report facts. The loan accrued per the terms of the note. As for the bk story? 70%+/- of chapter 13's dismiss... Servicers, keep the original terms till discharge and then make alterations to the account. The terms in a confirmation are based on the discharge. If a BK dismisses, it goes back to contractual status and the confirmation is moot. If someone doesn't pay in 5 years (and it happens) they accrue interest, lates and legal fees... Why is anyone upset by this?

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