Why the Mortgage Industry Needs to be Regulated
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Consumer crusader Elizabeth Warren, a Harvard Law professor, has a great blog that particularly focuses on the ambiguities and sometimes "bald-face" fraud that takes place in the mortgage industry.
Below is a story of Ms. Warren, from her blog "creditslips.org," and a client who was facing bankruptcy. However, problems arose when it came to settling the debt of the client's mortgage. She calls the type of mortgage her client was in as: 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.
It is doubtful that this type of mortgage is as prevalent as some of the fraudulent teaser rate mortgages that had been written over the last three years, but, nonetheless, it shows why the mortgage industry, if not the whole lending industry (credit cards, student loans, etc.), needs better oversight and tighter regulations placed on it.