Once in a while you hear a story that is so eggergious you just have to scream to the world about it. This is such a story.
This is not a story about an uneducated unsavvy borrower who did not understand the difference between a fixed mortgage and an arm. No, this is the story of a college educated successful middle class professional who himself worked in the mortgage industry.
As you read, please keep in mind, if this can happen to someone like him, it could also have happened to you or almost any one of us.
Follow below the fold for a look into the sordid practices of unregulated lenders in 21st century America.
This story starts just a few years ago when Newlyweds Ken and Stacy decided it was time to buy their first home. I'm not sure what Stacy's occupation is, but Ken is a software engineer. Part of the prosperous well heeled modern middle class.
After deciding on a house that fit their budget and lifestyle, it was time to make an offer. Their offer was accepted and they proceeded to obtain financing. It's worth noting here that this is NOT a credit challenged couple. They had savings, money for a downpayment, a six figure income and good credit.
Ken had worked in the mortgage industry for over ten years as a technology consultant to a mortgage broker in Denver. So when it came time to get financing, rather than go to his bank, he figured he'd reward his long time client with his business. Big mistake, as it would turn out.
Ken and Stacy qualified for and negotiated a 30 year fixed rate mortgage for their new house. After their downpayment, they arranged to finance a mortgage of $240,000 on their $260,000 house.
Being a financially responsible and careful couple, they requested to review the mortgage paperwork prior to closing. So the night before they went through the contract and various asundry paperwork with a fine tooth comb to make sure all was fair and in good order.
Satisfied with the terms and conditions they proceeded to go to closing the next day. They were very excited and quickly signed all the required documents that their mortgage broker brought in for them.
They completed the closing and were handed the keys and a bottle of champagne to celebrate their new life together. Sadly, the story does not end there.
Suspecting nothing, they proceeded to move into their new home and begin a life of suburban marital bliss. Part of their deal was that within 45 days of closing, they were supposed to receive a check for $7000 from the lender. They were shocked to receive a check fo just $1200. Something was clearly amiss.
So when they called the lender to find out what was going on they were told that this was all their agreement entitled them to. This is the agreement they had signed, why would they expect more.
Shocked, they decided to review their loan paperwork to see what the misunderstanding could have been. Indeed the text of the mortgage paperwork stated $1200 not $7000.
But they had just read and verified it the night before closing. What could have happened? So they pulled out the old copies of the loan paperwork that they had reviewed before closing. The paperwork had been switched by the mortgage broker. Then, another bombshell.
Realizing that they had been had, they reviewed all of the closing documents and compared them to the versions they had received the night before closing. Ken and Stacy had agreed to a 30 year fixed mortgage, but the mortgage broker switched their paperwork for a 5 year fixed arm.
Bad enough but it get's worse for my friend Ken. Their Arm is scheduled to expire soon and so he wants to refinance. Problem is that due to a rapid decline in property values, his $260,000 house now only appraises for $210,000. And his outstanding balance is $240,000, a difference of $30,00.
Ken and Stacy have reluctantly decided to raid their daughter's college fund to come up with enough money to refinance out of this predatory loan.
Ken and Stacy are not unique, and they are not gullible buyers. They are careful, responsible, financially solvent and well educated middle class Americans. If this kind of thing is happening to people like them, what can we expect for the millions of working class Americans who are not nearly as savvy?
Now their case is the result of an unscrupulous lender, there is no question of that. And it could be argued that no amount of regulation would have prevented someone that unscrupulous from doing this. But the deregulated lending environment of the past several years has created an environment in which such lenders could flourish.
Tighter regulation would have acted as a repellent to unscrupulous lenders such as Ken's lender, because anyone that unscrupulous would certainly not have stopped short of bilking less sophisticated buyers by openly selling them mortgage products they have no real understanding of.