My Foreclosure, My Short Sale, My Pay Option ARM and My Predatory Lender

By | July 24, 2009

option arm negative amortizationI bought a “pay option ARM” loan a few years ago. Dumbest financial  move I ever made.

As of last week I have two offers for $150K on my home, on which, after making “interest only payments” for 3 years, I still owe the full amount, $300K.

Bank of America wants $170 based on the BPO (buyer’s price opinion). No word from the buyers yet if they want to pay that much.

Thought: Anyone issuing a BPO should be forced to pay that much for the place if the bank can’t get what the bank’s agent says the buyer should pay.

Meanwhile, because I have both a 1st (an interest only pay option ARM) and a 2nd (HELOC), I am now getting two calls per day asking if I will make a payment. I tell them the same thing every time, as I have for the last 12 months:

This was my first home, so I took a lot of things on faith. I trusted the loan officer. I was told that I could afford the payments. My income has not changed in four years. When my adjustable rate loan adjusts, however, I will not be able to afford the new payments. That’s the problem with the 5/1 interest only pay option ARM.

My business decision, faced with this trap, was to stop paying a year early and try to negotiate, or take the foreclosure and save a year’s worth of payments from going into a black hole. No deal was reachable, despite three work out negotiation attempts … but perhaps the bank’s short sale counter offer of $170K would not have happened had I kept making payments for the last year. They turned down my only other short sale offer of $240K a year ago when I was still making payments.

With the option ARM, they want you to keep paying and have faith that something will work out when the rate adjusts. Nope. The way I see it, my lender already fooled me once.  That’s enough.

What is a pay option ARM?

Imagine you were thinking of buying a home. Based on your income of $5000 monthly you may have calculated that you can afford $1600 per month and you went to LendingTree.com and saw that at todays rate you could buy a home for $210,000. Then you went to a mortgage broker and found out that this genius has a way for you to buy a home for $450,000 in a much better neighborhood with a pool and cobblestone driveways for THE SAME PAYMENT. You went for it, of course. What you were never told was that you were not really paying the mortgage every month, but borrowing from the bank every month so that you could afford to live there. This isn’t imaginary though, there are many people in this situation and they are about to lose thier homes.

The animal we are speaking about is the Pay-Option ARM. This is an adjustable rate mortgage where the borrower is given the option of paying principle and interest, interest only, or just the index (what it costs the bank to lend to you without profit.) In many cases, this index was as low as 1%. As you can imagine the payment is very low. (There are many types of pay-option ARMS, this is just an example but pretty standard.) The difference between what the true rate is and the minimum payment is put back onto the loan. In the case above, every month the borrower would pay the 1% at $1600 but every month $1800 was put right back into the loan. Once the loan amount reaches anywhere from 115%-125% of the original amount, or about $525,000 (about 40 payments) the lender takes away the ability to pay anything but the full principle and interest payments. So after about 3 years of living in a $450,000 home. The buyer’s payments go from $1600 to $3400 overnight. At a steady $5000 per month, this buyer is headed to foreclosure and owes $75,000 more than the original loan amount so has no equity to sell. – mdf

Can I sue B of A for the predatory lending practices of Countrywide and get my credit restored? That’s what should be happening here… but Countrywide no longer exists.

Here is another summary which fits my situation:

Defaults on a popular form of mortgage that gave home buyers a choice of how much to pay each month are rising and could rival those on subprime loans, potentially causing more trouble for investors and banks.

Nearly $750 billion of option adjustable-rate mortgages, or option ARMs, were issued from 2004 to 2007, according to Inside Mortgage Finance, an industry publication. Rising delinquencies are creating fresh challenges for companies such as Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. that acquired troubled option-ARM lenders.

wsj Jan 2009

Option ARMs typically were made to borrowers with higher credit scores than those getting subprime mortgages. But many of these borrowers were stretched thin even when they were making payments, and are particularly vulnerable to a weakening economy and falling home prices.

Here are some excerpts from Sen. Charles “Chuck” Schumer’s letter to Federal Home Loan Bank Chairman Ronald Rosenfeld.

… reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis. … Countrywide reportedly held $27 billion of “pay option ARMs” as of September 30, 2007, accounting for over one-third of the loans held for investment by the bank. Countrywide’s option ARMs were (and may still be) often underwritten with less than full documentation – according to UBS Warburg data prepared for the Wall Street Journal, 91 percent of Countrywide’s option ARMs underwritten in 2006 were “low doc.” It has been reported that delinquencies on Countrywide’s pay option ARMS are skyrocketing, jumping nearly 75 percent in the last quarter. – cnbc

How is my credit being damaged by a Countrywide con? The FBI is investigating:

“The FBI has been investigating potential fraud in the mortgage/sub-prime lending industry, however, we can not confirm or deny which companies are under investigation,” said FBI spokesman Richard Kolko. A law enforcement official told CNN that there are currently 16 companies being investigated. Both Countrywide and Bank of America (BAC, Fortune 500), which agreed in January to acquire Countrywide for $4 billion in stock, did not return calls to CNN. Calabasas, Calif.-based Countrywide is the nation’s largest home lender, responsible for roughly one-fifth of the mortgages in the United States. – cnn

In other words, the loan I bought looked great on the surface, but was a real lemon. We need a Loan Lemon Law to fix our credit!

How does an ordinary citizen go about creating a national law?

To get a federal law passed, it must be proposed by the House or Senate and signed by the President (or vetoed, and the veto overridden). Therefore, the only way to get into the system would be by contacting your state’s Senator or Representative in Congress. Make sure you have good notes on what you want to accomplish and how it will be done. – egd on yahoo answers

I propose we call it “the 2009 Consumer Credit Repair Loan Lemon Law”.  Is there already something like this in the works?

8 thoughts on “My Foreclosure, My Short Sale, My Pay Option ARM and My Predatory Lender

  1. Steve

    “The mortgage brokers scam.” You brought in your taxes and bank statements. Your broker says you’re self-employed so you need an Option-Arm due to your fluctuating income. What he didn’t tell you is he didn’t use your taxes to create the loan. He didn’t have to. No doc. and stated income loans allowed the broker to write down whatever and say you lied.
    All he had to do was make sure you signed and verify your bank statements showed enough cash reserves to survive a few years. Escrow closes and you spend the first year either making the Negative payments or combining your income with savings to make the interest or full. If you would have defaulted within the first year the lender would have raised a red flag. But you didn’t. Now its two years later and you can’t figure out where your savings is going. You qualified for the loan. What’s wrong? The answer. You never qualified to make the principal plus interest in the first place. You only qualified at best to make the Negative payment. It has nothing to do with the adjustment. Now even if that red flag appeared the lender wouldn’t have cared. They took out an L.P.M.I. (lenders paid mortgage insurance). I don’t mean the P.M.I. I’m talking about the high-risk insurance policy they took out on you. They were required to give you a written statement telling you you were a high-risk before the loan closed. Why? It caused you to pay a higher interest rate. It’s under… TITLE 12 CHAPTER 49–HOMEOWNERS PROTECTION
    Sec. 4905. Disclosure requirements for lender paid mortgage insurance.

    If you lied about the income then how does that income add up to be three times more than what was on your taxes. Did you lie to the IRS paying more in taxes so you could go out an qualify for a house you never could afford? Where is the loan data? Why was the income so difficult to prove. Does everyone in America work for cash?

    TITLE 12 CHAPTER 29–HOME MORTGAGE DISCLOSURE

    Sec. 2803. Maintenance of records and public disclosure.

    Loan data is suppose to be on file for 3 years after the first year.

    Are we now required to read the auto manual and supervise the mechanic before we sign for repairs? Are we now required to study medical journals before we sign and agree to surgery. Investigations found Toyota parts in my GM. Too bad. You signed. You lied. I got treated for Herpes when I had cold. Too bad. You signed. You lied. Who’s investigating the orgination of these loans?

  2. Larry

    Shakespeare said, “…first we hang all the lawyers!”
    I say, next we hang all the banksters and congress-“persons”!

  3. Steve

    Thank you. Vehicles unlike homes can be over bought using your own finances. You can agree to in house finacing and be liable for the purchase. It’s up to the dealership to accept and verify the credit. They aren’t obligated to verify your employment. Homes are much differn’t as to prequalifications to prevent you from over buying. Take your previous two years taxes and compare them to an online mortgage calculator. I’ll bet you’ll discover that with your 1st and 2nd combind you were never able to pay the principal and interest. You were a first time buyer who needed to be able to calculate the mortgage principal and interest, mortgage insurance premium [when applicable], hazard insurance premium, property taxes,home owners insurance, and homeowners’ association dues [when applicable])all in comparison to your debt to income ratio. Then you needed to calculate and explain the differences between fixed, Options, and Subprime along with origination points, and adjustable rate riders.
    How can anyone walk into an office to buy a home be this savy to creating a loan. But you signed one page out of several with a little box that said Gross income filled in or not. Now this box makes you irresponsible and a liar causing you to lose everything. Now they want you to modify and accept full responsibility. You hired a mortgage broker to service you yet your the corrupt one. Did you have the license or employed power to make the loan go through? The FBI is focused on mortgage modification scams but who again is going after the orgination? The lawyers wont touch it. They only want the quick buck to modify using the threat of Federal Court. Charges of fraud bringing in your broker and lender to rescind the mortgage would just take too long in court for them to show a profit.
    So now your forced to go Pro Se. Okay, show me the note but show me the loan data as well. It’s suppose to be on file. You were set up in a loan designed to fail. Don’t blame yourself. Don’t allow others to call you irresponsible or a liar. You are a victum of fraud.

  4. Scott casper

    Stop blaming everyone else for your own stupidity and/or irresponsibility. I have a pay option arm from countrywide too which I got in 2006 I am glad I got it too, because my current interest rate on 30 yr amortized (which is what I’ve always payed) is lower than a 30 fixed. Anyway, there were warnings next to the minimum payment option on the paper bill, the website and all documents that you sign on closing explaining what paying that min. payment wAs all about. It basically said “be careful”. You are an adult not a baby, it’s your fault not the bank’s not the government’s.

  5. Xeno

    Scott, I read the warnings. I only purchased the Pay Option ARM because I was given false information by the Countrywide loan expert about my refinance options if my home lost value.

    Actually, I read every word on every scrap of paper I was given. Since this was my first home purchase, I also read books, newspaper articles, mountains of paperwork (disclosures, insurance, HOA statements, and on and on…) and of course, I read the loan documents. I consulted friends and family members as well as several real estate agents and loan officers from about six different banks. I had everyone in my life thinking I was being absurdly cautious for dragging everything out by asking so many questions, going over and over my finances to see if I could afford the payments, demanding so many answers and negotiating every detail.

    I paid for my trust with a massive hit to my lifetime of excellent credit and I lost thousands of dollars in interest only payments.

    I’m posting this because I want other people to understand that when a loan officer tells them there are “many different instruments” available for refinancing if your home’s value drops and you have negative equity, that is a damn lie, one that cost me a hell of a lot of money and good credit. Insist on the 30 year fixed loan and if you can’t afford that, you can’t afford the home.

  6. Steve

    Scott, I’m not blaming the choices in loan products. I’m pointing out the scams behind them. Maybe there’s nothing wrong with your loan. But have you looked through your papers and found Form 1003(loan application) or Form 1008 (Transmittal Summary). Are those two pages even there or do they match up. Has the income been falsified. Up to date, my pages weren’t there. I had to go back to the brokers office to get copies since my title company has no records of my loan (just the good faith estimate). Have your called your title company and requested copies?
    I’m not denying being financially uneducated when it comes to loans. Thats why I sought out professional services to see if I even quailified. The stories for modifications are true. The lenders not picking up the phones. Requesting your financials and not getting back to you for months while you fall behind because it is also true you can’t get any help until you default. I tried exercising my rights requesting a loan audit. They legally have two months to respond. I just wanted to look at these docs. and see how I even qualififed for this loan in the first place before negotiating any type of modification. We’ll it’s been nine months and my lawyer just got a copy. But it’s too late they just sold my house to another bank at auction. I hope your thinking now. I just wanted to learn what hell happen or what went wrong. But now it’s not about me. It’s about Consumer Protection. I’ve grown tired of people like you patting yourself on the back for being financially savy. IT’S NOT ABOUT YOU! IT’S ABOUT EVERYONE! Because now you have unemployed people losing their homes with no defense. The banks/lenders are pushing these foreclosures gambling on the fact you wont be able to financially challenge them. Yes. It’s working. But I don’t mind risking the last of my savings in court if I can help someone else’s future. Please read this and decide for yourself what’s going. on.
    http://www.examiner.com/x-23008-Cleveland-Mortgage-Examiner~y2009m9d18-Varieties-of-fraud-and-predatory-lending-practices-and-tactics

  7. aldytop

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