The Mortgage Lender “Work it Out” Option: Be Careful What you Ask For!

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Mortgage companies are underfire by Congress to keep people in homes and find viable solutions when option ARMs adjust. But are mortgage companies really acting in your best interests? Here’s one case of what Countrywide did to “help” a customer:

The borrower has an $800k Pay Option ARM obtained in 2005. They bought a $1.1 million home with 25% down. Last month they hit their max negative cap of 115% and their payment went from roughly $3k per month to $5k per month. The total outstanding balance with the accrued negative amortization stood just above $900k. The home is now a rental and the gross rents are roughly $3k per month. The borrower moved out a few months back and are now renting closer to their jobs. The home is currently worth $515k according to Zillow.

They called Countrywide for help. Boy, did Countrywide help…helped themselves.

Countrywide immediately sent them documents making the new monthly payment less than $1600 per month by giving them 2% interest only for the next 5-years. Plus taxes and insurance the new payment is magically around $3k per month. At the end of 5-years it returns to its original terms, which will be a fully-amortizing loan that must pay off within the remaining 23-years. At this point undoubtedly the borrower will default. This 5-year ‘deal’ is far worse than an original 100% 2/28 or Pay Option ARM ever was.

The borrower received the documentation on a Friday and had to have them back by the following Tuesday or the ‘deal’ would be rescinded. The borrower also had to agree to waive their rights against any claims against Countrywide in the future for any purpose.

Breaking it down, this is what Countrywide essentially did. They:

  • Refinanced a $515k home with a loan balance of $900k
  • Put the borrower underwater by $385k in a pen stroke without recourse
  • Stuck the borrower in a home that they can’t sell or refinance
  • Lured the borrower by using low monthly payments
  • Hid an ultimate default and subsequent foreclosure (ie, cleaned up their record for the Feds)
  • Averted a 50% write-down and pushed out the loss indefinitely into the future

For more info on deceptive and predatory lending practices in today’s economic climate, check out:

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