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Sunday, June 1, 2008

An Unbelievable But True Mortgage Story

This story really starts about four years ago. A former mortgage colleague of mine had done several loans of a well to do couple in a posh Westen suburb of Chicago. The home was so beautiful that finally he offered to buy it from them if they ever decided to sell. Back in early 2005, the husband was offered a job overseas and thus his offer was reciprocated. In 2005, at the height of the real estate he bought this home for roughly 800k. As the real estate boom blew up, so did his own real estate purchasing. Within a year of this purchase, he owned several pieces of property including a summer home near Wisconsin Dells.

Everything was going great financially for my colleague until the market turned. By the end of 2006, he was struggling to make payments on his multiple properties. He was falling behind on his real estate taxes, and he was in dire straits. Because he carried more debt than his income could support, he would need a so called stated income loan. He was in a bind because he was behind on his real estate taxes on his main property and soon they would be sold. Since he could only do a stated income loan, rules said another mortgage professional had to do the loan.

The initial disclosures said the loan would have a rate just under 9%. Except when my colleague got to the closing table, the rate was suddenly near 11%. He was stuck between the proverbial rock and hard place. He had to have the taxes caught up and the loan would do that, but there was no way the payments would be affordable. Of course, all of this happened at the closing table because the unscrupulous broker he worked with decided to spring that fact on him then. Finally, my colleague decided to go ahead and sign for the loan.

Not surprisingly, he fell way behind on his payments. Of course, before the bank could sue him for foreclosure, he decided to pre empt their suit with one of his own. He would sue on the grounds of predatory lending. Now, the concept of predatory lending is rooted in the idea that borrower is not bright enough to know they are being taken advantage of. Now, if you think it is ironic that a mortgage professional would sue on such grounds, the irony only starts there. You see he knew how he was being "ripped off" only because he was a mortgage professional. In fact, he essentially laid out all the evidence for his attorney, and made it one of the easiest cases he ever had. First, it is of course illegal to raise the rate 2% without telling the borrower. My former colleague noticed several other discrepancies like the fact that the right to cancel disclosure wasn't even for his loan. He noticed several such acts of fraud and predatory lending, and thus it began a legal battle that would last more than a year. Not only did he know how he was "ripped off", but he knew exactly what paperwork would prove it. Of course, he did, after all, mortgages is what he did for a living.

In the meantime, by mid 2007, things got so bad income wise for him that he fell behind on his summer home which he was now using as his main home. By July of 2007, the bank made their first attempt to foreclose on that property. It just so happened that one bank held onto both loans. My former colleague figured out that the best strategy was to wait as long as possible before responding. He was given 60 days and he waited 59 days before responding. He noticed that the copy of the mortgage disclosure only had 3 of the 14 pages that it contained. Never mind of course that he likely had the full set of disclosures, the important thing is that the bank didn't follow the law. As such, the case was dismissed after they wasted nearly two months.

The bank re filed. This time my former colleague noticed that the bank was trying to claim that his second home was an investment property. Their motivation would have been that it is much easier to remove a borrower from an investment property than a primary or secondary residence. Well, not only were the closing statements clear that this was a second home, but in his other case, the bank tried to claim his other property was also an investment property. In that case, they claimed that this particular property was his main property. Of course, they couldn't have it both ways and the judge agreed. Thus, the case was dismissed again.

My former colleague then came to them with a proposal. He would perform a short sale, however they had to agree to allow him to sell his personal property for 20k and keep the proceeds. They finally relented and he was able to sell the home for 280k and his personal property for 20k. Of course, the home was nearly bare, and thus by then, the 20k was all nearly all profit, but then again, what would expect. Since he was selling personal property, of course the 20k was totally tax free.

Finally, just last month he settled with the bank on his other property. The bank agreed to move the mortgage payoff to 625k. This despite the mortgage actually being over 800k and my former colleague not making one payment for nearly two years.

Of course, to top it off. The law in Illinois says any capital gain below 250k is tax free. He expects to sell the property for about one million dollars. Since he bought it for over 800k, the profit he will make on this will also be tax free.

Thus, it turns out the mortgage crisis is not necessarily all that bad as long as you know what you are doing.

1 comment:

Anonymous said...

Why do you keep posting these old articles on LGF? Seems there are a handful that you post repeatedly with differing headlines. It's getting old, frankly.