This past weekend, I spoke again with someone who purchased a home which will now, in all probability, end up going back to the bank. At times like this, I wish I had a voodoo doll in the likeness of the loan officer who originated this loan. Here is the story which is the epitome of the mortgage melt-down.
The story begins with a borrower looking for some cashout for improvements to his existing home valued at roughly $300,000 dollars. He chose a loan officer recommended to him who also spoke his native language. This loan officer told the borrower that for the projected refinance payment, he would be able to buy a larger, newer house in a neighboring county. So the borrower pulled the equity out of his primary residence, the loan officer refinanced him into a payment-option ARM to keep his payment low while he sold his house, and they used the down-payment to put a contract on a much larger home through a Realtor referred by the loan officer. So far, not so bad, except for the owner occupied loan on a property the LO knew would be sold. Now the real mischief begins. The borrower's target payment for the new home was $1200 per month. The sales price of the new home was $575,000. (Hmmm, that's what I said.) The down-payment of $82,000 was not enough to make the loan work, so instead of finding a lower priced home, the LO also originated a second mortgage of $16,000 on the first home and wrote both a first and second mortgage on the new home with a pay-option ARM as the first loan (at $1400 per month before escrows) and just over $200 per month on the second mortgage. Looking at the HUD-1 settlement statements, these two first mortgages generated $12,000 and $18,000 in commission-able revenue to the mortgage broker, excluding anything made for the second mortgages.
Advancing the story two years, we now have a borrower who was unable to sell the first home, who now owes more than market value due to the negative amortization. He also now owes just shy of $530,000 on his beautiful new home which is worth around $500,000. Oh wait, I forgot to mention that he only makes $30,000 per year, and obtained all 4 of his mortgages as stated income loans (again, HMMM?). He rents his original home for $600 less than his interest-only payment, just above his minimum payment and has been adding $800 per month to his mortgage balance. He rents the basement and one room of his beautiful new home just to make the minimum payment, and adds roughly $1800 per month to the principal balance on that mortgage. His initial credit scores have dropped below 500, as he is barely able to cover his mortgage and has become delinquent on his credit cards and even sold one of his 2 cars. Last, but not least, the servicer for his first mortgage didn't pay his property taxes, even though the borrower paid into an escrow account, so the county sued for and received a judgement and garnishment for back taxes an proceeded to garnish the borrowers entire paycheck for over a month, until the taxes were paid by the servicing company. (The borrower did get a tax refund from the county for the overage, but still has a judgement on his credit report.) And for this "service", the loan officer and his mortgage broker made over $30,000 in revenue.
Contributing factors include a language barrier, a complex mortgage product with disclosures the borrower didn't understand and a property the borrower couldn't afford. Although it troubles me to admit, The WORST factor in this situation was the Loan Officer.
The worst part of this story is that the referred loan officer has "helped" quite a few members of his ethnic community, many of whom have also fallen into foreclosure. I do not excuse the borrower for signing documents that he did not understand, or loan applications with income that were not accurate. I can only wonder at the explanations made by the loan officer "don't worry, I'll fix it", " I can get this done for you", etc.
Unfortunately, looking at the proposed changes to regulations regarding disclosures, I also don't see anything which would have prevented this (assuming that the loan products were still being offered). Although the second mortgage market has dried up, this scenario could have occurred with first mortgages only with the same result.
About the Author: Brian Piper is a Senior Loan Officer with East West Mortgage in Vienna Virginia, one of the largest broker in the country. Also online at http://www.bestvirginiahomeloans.com/ or http://mortgageblog.bestvirginiahomeloans.com/ .