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Reading Redux

posted by Angie Littwin

Last year around this time, I wrote a Credit Slips post about a law-professor friend whose realtor expressed shock and dismay when she and her husband insisted on reading every document she gave them to sign regarding the house they were purchasing.  In the post, I somewhat sanctimoniously referred to myself as someone who always reads her contracts.  This year, it was my turn, and I have to admit that I did not pass my own test.

I faithfully read every home-purchasing form contract my realtor and lender sent me from the day I made the offer until the day before closing.  I even actually managed to do something productive for all my trouble; I switched inspectors because the first one insisted on a rights-waiving contract.  But partway through the closing itself, faced with two inches of papers to sign, my resolve wavered.  I was tired and hungry, and my mind kept circling around to all the moving-related errands I needed to do in Austin before the end of business hours and my flight out of town the next day.  (A word to the wise:  Never go to a closing on an empty stomach.)  So I took a few shortcuts.

Fortunately, I have a great realtor who has been in the business a long time.  She was able to identify all the pages that were state-mandated disclosures.  Those, I felt comfortable signing based on an oral description since there was absolutely nothing I could do about them anyway.  Then, I started skimming all paragraphs that began with something like, “In the event of default, Lender may….”  I’m about to starting teaching Secured Transactions so I already know how terrible things can be once you go into default, and I’m able to count the ways that can happen. 

Even with this method, I did find a few unsavory clauses.  If I make any changes to the borrower listed on the title – say, if I were to get married and add a husband on the title – and forget to tell my lender, the bank has the right to accelerate the loan, demanding the entire amount immediately.  Meanwhile, if the lender sells my loan to an entity I feel uncomfortable with or have never heard of, I have no right to oppose the sale and am entitled to only fifteen days notice. (After finding these provisions, what was I supposed to do? Not sign?) But even so, by the time I got to the final page – which, eerily enough, happened to be the one where I acknowledge that I am bound by the written word of the contracts notwithstanding any oral representations to the contrary – I was a nervous wreck.  What if there was there was some terrible clause hidden in all those papers, one that had I found it, would be bad enough to make me halt the entire process?  In this case, I hope I’ll never know, because I just couldn’t bring myself to go through the mound of papers again.

As I was leaving, I had an idea that nearly caused me to smack myself on the forehead I felt so dumb.  Why hadn’t I asked to receive a copy of the papers ahead of time?  There are a variety of ways to address the problem of consumers making the largest purchase of their lives based on forms they usually don’t read, often can’t understand, and couldn’t do much about anyway.  But at the very least, it should be standard practice to distribute these forms beforehand, so that people have the option of reading them at their leisure, preferably after a good meal.  I know it wouldn’t help everybody, but it probably would lead to a few more informed home buyers.  If borrowers received the forms far enough ahead of closing, a sophisticated few might even choose their lender or broker based in part on the contracts.  In the meantime, the next time I buy a house, I’ll make sure to eat a hearty breakfast.

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Thanks for this post Angie. It starkly illustrates the dramatically asymmetrical power in a housing transaction. We live in a world of markets, networks and organizations. We do not live our lives in mid-20th century communities where people could rely on the word of their local banker and, in any event, the contracts associated with house purchases did not require a legal education -- not to mention a hearty breakfast -- to wade through. In this new world of ours, it is simply the highest form of nonsense to assert that 'borrowers should know better in one of the biggest acquisitions of their lives'. As a concept, that idea -- that assertion -- is a legacy of the world of places that has passed us by. It is nonsensical in our new complex world of markets, networks and organizations -- including, by the way, markets for government policy and adjudication that are now subject to competition among organizations and networks whose objectives are to gain share and profits from businesses who, in turn, seek market share from consumers who are simply not up to the legal, financial, engineering and other aspects conjoined to a house purchase.

This is the real world in which we live. "Borrowers should have known better" comes from the Hollywood (and Fox) world of yesteryear.

Are there some consumers out there who successfully avoided the mess? Yes. But they are only one segment of people in a world of market segments. Hurrah for them. But their existence is insufficient as counter proof to the actual reality that caused millions of others to move down a less promising path.

The commercial world is apparently one step ahead of us, Angie. I asked for copies of the paperwork in advance of my closing in Illinois last year, and I was told that I could not get ANYTHING in advance--not even the exact amount of the certified check I was to bring to closing! Seriously, I had to wait until the morning of closing to find out the amount of certified funds I needed to bring to closing--and even then, they told me the wrong amount, and I had to write a personal check for even more on the spot. It was nerve-wracking to say the least. All of this ballyhoo about disclosure just gives me fits. In most transactions that I can envision that might cause trouble for consumers, the disclosures are never made at a time when they might be useful or affect behavior, and I'm sure it's NOT just odd luck that makes it "impossible" for people who might understand and react to them to get the documents we need in advance. Like Nathalie Martin, I was extremely struck by Elizabeth Warren's presentation at the ABI/UI debt conference: these banks, etc., know more about us than we know about ourselves, and they're not about to let a bunch of stinkin' disclosures mess up their show.

Had a similar experience a few years ago when my parents were considering having a house built. They set up an appointment to meet with the builder that built most of the homes in that association. I went in with them. Based on the conversation my dad had with the office when he set up the appointment, we *expected* to have a 2 or 3 hour meeting to talk about the contract, prices, etc. We then expected to have another, shorter, meeting later to discuss options and specifics.

Instead, we found out they'd scheduled us for 45 minutes, most of which they took up with "what kind of wood do you want on your kitchen cupboards" types of questions. Specifics were very hard to drag out of them. And they clearly thought that our next meeting was going to be a 15-minute "sign the papers" event.

So I asked for a copy of the contract in advance. They tried to tell me they couldn't give it to me, but we said in that case we wanted to cancel the appointment. So they faxed me a blank.

It was 7 pages of the most uneven, lopsided contract clauses I'd ever seen. They wanted us to do all of the work of getting permits and arranging for electrical for the site, marking the property lines and where the house should go, etc. If we messed up on the property lines or home location, that was our problem. But if we marked it properly, and they dug in the wrong spot anyway, that was our problem too. In this whole contract, there was basically NOTHING they were required to do (not even do their best or act in good faith), while we were responsible for everything from acts of nature to acts of incompetence by the builder . . . .

I actually tried to talk to them about revising the contract to something more reasonable, but it was clear from their response that they simply weren't willing to agree to anything that might actually bind them to, well, anything.

Professor Littwin, both you and Professor Kilborn (and anyone else who has ever purchased a home) should check with your county registry to see if your note has already been sold on the secondary market - especially if the entity collecting your payments has changed since purchase.

One thing I tell everyone I meet in the buying process is to have a good attorney scheduled for time within the 72 hour rescission window whenever possible. Rarely, if ever, do lenders allow mortgage contracts to be viewed prior to closing so the best hope is to review everything under a microscope within three days of closing - and don't plan on moving until the fourth day after close just in case.

The other option is the three *year* right of rescission per TILA, I believe if you meet those criteria.

Other than that, while reviewing your mortgage docs at your leisure, make note of everything that the lender/note holder can/cannot do or charge you for i.e. Broker Price opinions, late fees - and how much the late fees are, interest on corporate advances, any kind of "property preservation fees", how they handle force or "lender" placed insurance, how they handle the sale of the servicing rights to your loan, etc.

And just to further cya with them, round your monthly payment up to at least the next dollar and coordinate the "cents" payment to the calender month that they payment was made. Ex. July's $1024.00 monthly payment would be $1025.07, August $1025.08, etc. By doing this it just makes it that much easier to track which month each payment SHOULD have been applied to should you, dog forbid, ever have any problems with your payments.

Even if you did find something you didn't like at closing, if you said no at closing you still would have probably breached the contract by not closing by a certain day. "Rock and a hard place". You could have extended the contracted sale date but "hammering out" the details or finding another lender would have made your eyes crossed and it is uncertain if the sellers would have played ball. It would be like dangling a carrot in front of you and you could not reach it unless you complied and played by their rules.

You can see how exposed a unsophisticated debtor could be if the lender pulled a "bait and switch" at closing. The pressure to close and not read thru the documents is huge. As we can see even the more sophisticated can find it daunting to say the least. AND if I can go a bit further, I see a lot of people in Chapter 13 Bankruptcy with escrow shortages. The calculations for taxes and insurance often are low from the "get go". When I was looking, like a year ago, I reviewed the good faith estimate, even close to closing, it was underestimating the taxes on the house and land. I went to the county website and found out exactly what the taxes were per year and made the lender change the figures. Same with homeowners insurance, I got a quote from our insurance provider and had the lender change those numbers…… up! I see a lot of people who start off bad in their first home because of silly numbers at closing. A "possible" reason could be that unsophisticated consumers make financial decisions by asking "how much per month?" not "how much? and “why?”. Lender puts a low number out there consumer says "Yes". Never mind that it's an ARM or that there was a miscalculation of PITI, broker and or agent walks with a commission and the "tide" catches up to the consumer a year or two later.

But who does that? Who does that kind of research or has the time to do it for that matter? Who knows how?

PART 226--TRUTH IN LENDING (REGULATION Z)Closed End Credit
http://frwebgate.access.gpo.gov/cgi-bin/get-cfr.cgi?TITLE=12&PART=226&SECTION=23&YEAR=2001&TYPE=TEXT


PART 226--TRUTH IN LENDING (REGULATION Z)Open End Credit
http://frwebgate.access.gpo.gov/cgi-bin/get-cfr.cgi?TITLE=12&PART=226&SECTION=15&YEAR=2001&TYPE=TEXT

These may or may not help you a bit, Patches...

I love this site.....

Thanks Mike...... Just put them into my "fab five".

The thick stack of closing documents are why banks, lawyers, and government should never work together. If you didn't have attorney's salivating at every opportunity to sue the banks, closing docs would probably be a 1/4 of their size and complexity.

When I am explaining closing docs to my borrowers, most docs can be explained quite simply. For the most part, the docs basically say "You pay, you stay." The rest is what happens when you don't pay.

There definitely needs to be some simplification of closing docs and disclosures, but the reality is that with more calls for regulation and legal liability, it won't happen. The stack is going to get thicker. The banks are simply playing CYA.

Regardless, consumers need to understand that buying a home is your largest financial transaction. Most people treat it like buying a television. I have seen people spend more time researching flat screens than trying to understand their mortgage, the home buying process, etc.

I recently saw a client who was about to buy a home. My last-word piece of advice? Ask for copies of all the closing documents ahead of time and bring them to me for review and discussion.

His response? "Good idea."

"Meanwhile, if the lender sells my loan to an entity I feel uncomfortable with or have never heard of, I have no right to oppose the sale and am entitled to only fifteen days notice."

We were working through PHH, so we knew we would be sold (they are very upfront about it--or at least were in 1997), but I'm curious as to why you would conceive it as objectionable that your loan might be sold, given that none of the terms would (or could) be changed in the selling?

"I'm curious as to why you would conceive it as objectionable that your loan might be sold, given that none of the terms would (or could) be changed in the selling?"

Depends on who is buying the loan, Ken. More likely than not, if loan is sold, it's being sold into the secondary market for securitization. That being the case, now not only do you have to contend with a new note holder but you may very well end up with a new servicer. And if you think that having your note owned by an entity that you don't care for is bad imagine what it's like if you end up with a Litton, EMC, Fairbanks/SPS, Ocwen, Saxon, C-wide, Wilshire or any one of a number of other third party servicers known for their less than satisfactory performances shall we say. I have been in contact with victims of the various aforementioned servicers whose loan terms DID change because of the servicer involved. I am familiar with one case whereby a victim settled with one servicer only to be sold to another. When the second servicer took over, not only did it deny any knowledge of the victim's settlement with servicer 1 but they back-dated all of the assignments involving the victim's loan in an attempt to wipe out the chain of title.

Throw "Mortgage Servicing Fraud" at your favorite search engine when you've got a minute or three.

Thanks, everyone, for the great comments. My analogous post last year also generated a lot of feedback, so this topic seems to hit a nerve. A couple quick responses:

Ken, there are several reasons why I don’t like the idea of my loan being sold. First is the most trivial one which is also the one most likely (hopefully) to affect me personally: the hassle factor. One reason why I’m so uptight about reading my contracts in the beginning is that I’m not the most organized bill payer in the world (shameful for a commercial law professor, I know). To compensate for this tendency, I do everything I can by automatic bill pay. This is great where there are no changes in my financial transactions, but a royal pain when there are. My closing documents say that I have sixty days after the loan sale in which payments wrongly sent to my seller-lender must be counted as timely by my buyer-lender. But it can take more than sixty days for a change in an auto-pay system to take effect – correctly, that is.

Second, the new lender may not legally be able to change the terms, but as fellow blogger Katie Porter has shown [http://www.nytimes.com/2007/11/06/business/06mortgage.html?scp=3&sq=porter+and+mortgage&st=nyt], some lenders have a habit of changing the terms whether it’s legal or not. Even if I never find myself in the position where lenders are more prone to adding such fees (i.e., default or foreclosure), I don’t like the idea of the revenue from the largest purchase I’ve ever made supporting a bank with a particularly negative history in this area. Finally, if I were ever to find myself in trouble, having had my loan sold, perhaps multiple times, would make it more difficult for me to find the right person to speak with about trying to work something out. One factor that contributed to the current foreclosure crisis is that many borrowers could not figure out who actually owned and serviced their loans.

Russ, I tend to agree that many of the pages I had to sign represented the ghosts of lawsuits past, just as a new traffic light often means that there was an accident at that intersection. But I tend to lean in the other direction when it comes to policy prescriptions. I wouldn’t want to restrict the lawsuits because I do think that borrowers need legal protection from illegal lender practices (see the article about Katie’s study above). I would like to see the forms standardized, either by states or by an industry group, and lenders be required to highlight any non-standard clauses. Yes, good professionals like you appear to be can explain the forms to their clients, but the problem is that if the lawyer, realtor, or title company officer ever gets it wrong, the client is bound by the written words of the document.

Jason and Jen, I’m disappointed but not entirely surprised that the mortgage industry is a step ahead of me on this one. Mike, that’s a great idea to counter the problem. I’m past the 72-hour window on this purchase since I closed more than a week ago, but I will start to spread the word.

Angie

The full link for Katie's article was cut off in my previous comment. Here's the whole thing: http://www.nytimes.com/2007/11/06/business/06mortgage.
html?scp=3&sq=porter+and+mortgage&st=nyt

Just to make absolutely clear, Professor. You may NEVER know when your NOTE, in and of itself, is sold. Lenders/note holders aren't required by law to inform borrowers when the note is sold - only when the ***servicing rights*** are sold. Your note could be sold literally 100 times and if the servicing rights remained with the same servicer you would never know it unless you periodically hit your county registry.

That is one of the complaints that so many have against MERS.

Yes, thanks, Mike, for clarifying.

At the height of the housing boom we decided to refinance for a lower fixed rate. At "closing" there was something objectionable in the paperwork (I read everything). After a bit of discussion, I decided not to proceed with the paperwork as written. While, the rep was clearly surprised, the corrections were made and we closed a few days later.

We had the luxury of waiting the few days because we were not actually moving. I am totally sympathetic to the majority who are locked into the timeframe.

The required "Truth in Lending" paperwork should be expanded to include the contract ... all 2 inches of it.

"If I make any changes to the borrower listed on the title – say, if I were to get married and add a husband on the title – and forget to tell my lender, the bank has the right to accelerate the loan, demanding the entire amount immediately."

This clause is illegal or at least unenforceable in many situations, because of the Garn - St. Germain Act. See subsection (d)(6)

TITLE 12 > CHAPTER 13 > § 1701j–3
Preemption of due-on-sale prohibitions

. . . .
(d) Exemption of specified transfers or dispositions
With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon—
(1) the creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(2) the creation of a purchase money security interest for household appliances;
(3) a transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(4) the granting of a leasehold interest of three years or less not containing an option to purchase;
(5) a transfer to a relative resulting from the death of a borrower;
(6) a transfer where the spouse or children of the borrower become an owner of the property;
(7) a transfer resulting from a decree of a dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(9) any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board.

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