“Teaser” Payments: Trick or Treat?

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In the final analysis, I think a reverse amortization loan is a way of hiding the true amount of the debt. —- Neil F Garfield, livinglies.me

As an introduction, let me remind you that the viability and affordability of the loan, the loan to value ratios and all the other facts and ratios and computations are the responsibility of the lender, who must faithfully disclose the results to the borrower. It is a myth that these bad loans were in any way related to the bad intent of borrowers.

I have been examining and analyzing loans that are referred to as “reverse amortization loans”. They are, in every case, “teaser payments” that trap homeowners into a deal that guarantees they will not keep their home — even if it has been in their family for generations. And they are loans, in my opinion, that contain secret balloon payments. Nothing in this article should be construed as abandoning the fact that the “lender” never actually made the loan, nor that the actual lenders (investors) would never have approved the loan. The point of this article is that the borrower would not have approved the deal either if they had been informed of the real nature of the sham loan (even if it was real).

Teaser payments are neither illegal nor unfair (if they don’t involve reverse amortization). They have been used all over the world with great success. The deal is that they pay a lower payment before they get to the real payment. Nothing is owed on the lower interest or even lower escrow that results from such a loan product devised and prepared for signature by the Banks or agents for the Banks.

And remember again that when I refer to the Banks, I am talking about intermediary banks that in the “securitization” era were not making loans but were approving paperwork that nobody in their right might would have have approved under any interpretation of national underwriting standards. These banks diverted money and title from the actual transaction in which money from strangers and title of the homeowners was diverted from the real transaction — giving a problem to both. This left “investors” without an investment and the borrowers with corrupt title.

In my opinion the way the teaser payment option was handled in the era of securitization, the borrower ended up with an unaffordable loan with terms that he or she would not have approved and which no bank was permitted to approve under State and Federal lending laws. The result was a hidden balloon and hidden payments of principal and interest payments far higher than the apparent interest rate on the face of the note. In most cases, the requirement that the documents and good faith estimate were never provided to the borrower, to make sure that the sophisticated borrower would not have an opportunity to think about it.

In one case that is representative of many others I have seen, the interest rate was stated as 8.75%, but that was not true. The principal was fixed at $700,000, but that wasn’t true either. The principal was definitely going higher each month for about 26 months, at which point, the principal would have been 115% of the original principal on the note. THAT is because each teaser payment of a fraction of the amount due for interest alone, was being added to the principal due. That is reverse amortization. But that is only part of the story.

When the principal has risen to 115% of the stated principal due in the closing documents, the loan reverts from a teaser payment — promised for several years — to a full amortized payments. So the original teaser payments was $2300 per month, while the amount added to principal was around $3000 PER MONTH. Thus after her first payment, the borrower owed $703,000. While the note and disclosure documents referred to a teaser payment that would continue for five years, that was impossible — because deep in the riders to the note there was a provision that stated the teaser payment would stop when the accrued payment exceed 115% of the original principal stated on the promissory note.

With the original principal at $700,000, the interest due was around $5100 per month on the original principal. 115% of $700,000 is $805,000, which represents a hidden increase of principal built into the payment schedule. That is an increase of $105,000 for as long as it takes with the hidden accrued interest computed in the background and not disclosed to the borrower before, during or after the “loan closing.” For a loan requiring “20% down payment” this is lost money. The 20% vanishes at the loan closing while the borrower thinks they have equity in their property. They don’t — even if property prices had been maintained.

The hidden increase of $105,000 happens a lot sooner than you think. It is called “reverse amortization” for a reason. But the unsophisticated borrower, this computation is unknown and impossible to run. In the first month the interest rate of 8.875% is now applied against a “principal” due of $703,000. This raises the hidden interest due from around $3000 per month to $3025. Each month the hidden accrued interest being added to “principal” rises by $25 per month. At the end of the first year, the payment due and unpaid principal is rising by $3300 per month. At the end of the second year it is more than $3600 per month. And at the end of the third year, if you get that far the actual computation makes the accrued interest (and therefore the principal due) rise by over $4,000 per month.

Using the above figures which are rounded and “smoothed” for purposes of this article (they are actually higher), principal has gone up by around $20,000 in the first year, $56,000 in the second year, and $76,000 in the third year. So by the end of the third year, the principal due has changed from the original $700,000 to over $850,000. But this passes the threshold of $105,000 beyond which interest will no longer accrue and will be payable in full. And THAT means that during the third year, the payment changes from $2300 to the full interest payment of $5900 per month plus amortized principal plus taxes plus insurance. Hence the payment has changed to over $6500 per month plus taxes and insurance.

For a household that qualified for the $2300 payment, the rise in payment means a guaranteed loss of their home if the loan was real and the documents were enforceable. This is a hidden balloon. The company calling itself the “lender” or “servicer” is obviously not going to get many payments at the new rate. So you call up and they tell you that in order to get a loan modification, which was probably promised to you at your original “loan closing” you must be three months behind in your payments.

Relieved that you don’t need to pay an amount you can’t pay anyway, and afraid you are going to lose everything if you don’t follow the advice of the “customer service representative, you stop paying and find yourself looking at a notice of default. The company tells you don’t worry you are in process for modification when i fact they are preparing to foreclose. There are probably a few million families that have been through this process of “lost paperwork” redoing it several times, “incomplete” etc. only to be told that you don’t “qualify” or the “investor has turned down your offer (which is a lie because the investor has not even seen your file much less considered any offer for modification).

Next comes the notice of acceleration either in a letter or in a lawsuit for foreclosure and suddenly the borrower knows they are screwed but feels it is their own fault. They feel ashamed and they feel like a deadbeat but they really don’t understand how they got to this point. THAT is the hidden balloon — an acceleration in about 26 months that is virtually guaranteed. The entire balance becomes due which of course you cannot pay. If you could have paid the full balance you would not have have taken a loan. You never had a chance. But that is only the first balloon payment that is not revealed to the borrower at his or her “loan closing.”

The second one comes at the end of 36 months. And that is because the computation of the amortized payment has been based upon the original principal and the original interest rate, both of which has changed. So even if you made it to 36 months, you would be told that you will be in foreclosure unless you pay the unpaid principal balance as the “bank” has computed it, which will probably be around $50,000-$70,000.

Florida law requires balloon payments to be disclosed in very prominent fashion. In these cases it not only was not disclosed, it was hidden from the borrower.

It is unfair and illegal to force this idiotic loan upon either the investor whose money was used to fund it without their knowledge or consent, or the borrower who obviously would not have signed a loan that he or she had no chance of paying. This is why forensic reviewers are necessary and expert witnesses are necessary. But for those of you who are entering into trial without benefit of forensic reviews and experts, you can still do this computation yourself and see what happens. Or any accountant can compute the final figures for you.

It is simple and simply wrong. And while you are at it, ask any lender of any kind anywhere if they put THEIR OWN MONEY at risk making a loan like that. Notice that I have not even bothered to mentioned the inflated appraisal.

FYI. Failure to Disclose in capital letters with the statutory language in Florida extends the maturity date indefinitely untinl interest and principal are paid in full. For Florida law see

Florida Balloon Payments

But in addition, the failure to disclose this also violates the Federal Truth in Lending Act. And the failure to provide a good faith estimate three days prior to closing is also a violation — all leading to rescission. The 9th Circuit, which had said that rescission requires tender or ability to tender the money back, reversed itself and said that is no longer necessary. But there is a three day right of rescission and a three year statute of limitations on rescission. In my opinion, both time limits would probably be applied BUT I also think that the legislation can be used defensively as corroboration for your argument that the borrower had no way of knowing what he or she was signing. AND the hidden nature of the balloon payments can arguably be said to be a scheme to trick the borrower, which MIGHT extend the running of the statute.

See Reg Z in full, but here is the part that I think is important:

(e) Prohibition on steering.

Prohibits a loan originator from “steering” a consumer to a lender offering less favorable terms in order to increase the loan originator’s compensation.

Provides a safe harbor to facilitate compliance. The safe harbor is met if the consumer is presented with loan offers for each type of transaction in which the consumer expresses an interest (that is, a fixed rate loan, adjustable rate loan, or a reverse mortgage); and the loan options presented to the consumer include:

  • (A) the loan with the lowest interest rate for which the consumer qualifies;
  • (B) the loan with the lowest total dollar amount for origination points or fees, and discount points, and
  • (C) the loan with the lowest rate for which the consumer qualifies for a loan without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation.

To be within the safe harbor, the loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business. The loan originator can present fewer than three loans and satisfy the safe harbor, if the loan(s) presented to the consumer otherwise meet the criteria in the rule.

The loan originator must have a good faith belief that the options presented to the consumer are loans for which the consumer likely qualifies. For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in the rule.

< Back to Regulation Z

 

The Importance of Discovery and Motion Practice

Practically all the questions I get relate to how to prove the case that the loan was securitized. This is the wrong question. While it is good to have as much information about the pool a loan MIGHT BE INCLUDED, that doesn’t really answer the real question.

The real question is what is the identity of the creditor(s). The secondary question is what is owed on my obligation — not how much did I pay the servicer.

It might seem like a subtle distinction but it runs to the heart of the burden of proof. You can do all the research in the world and come up with the exact pool name that lists your property in the assets as a secured loan supporting the mortgage backed security that was issued and sold for real money to real investors.  But that will not tell you whether the loan was ever really accepted into the pool, whether it is still in the pool, or whether it is paid in whole or in part by third parties through various credit enhancement (insurance) contracts or federal bailout.

You must assume that everything is untrue. That includes the filings with the SEC. They may claim the loan is in the pool and even show an assignment. But as any first year law student will tell you there is no contract unless you have an offer AND an acceptance. If the terms of the pooling and service agreement say that the cutoff date is April 30 and the assignment is dated June 10, then by definition the loan is not in the pool unless there is some other documentation that overrides that very clear provision of the pooling and service agreement.

Even if it made it into the pool there are questions about the authenticity of the assignment, forgery and whether the pool structure was broken up (trust dissolved, or LLC dissolved) only to be broken up further into one or more new resecuritized pools. And even if that didn’t happen, someone related to this transaction most probably received payments from third parties. Were those allocated to your loan yet? Probably not. I haven’t heard about any borrower getting a letter with a new amortization schedule showing credits from insurance allocated to the principal originally due on the loan.

The pretender lenders want to direct the court’s attention to whether YOU paid your monthly payments, ignoring the fact that others have most likely made payments on your obligation. Remember every one of these isntruments derives its value from your loan. Therefore every payment on it needs to be credited to your loan whether the payment came from you or someone else. [You know all that talk about $20 billion from AIG going to Goldman Sachs? They are talking about YOUR LOAN!]

The error common to pro se litigants, lawyers and judges is that this is not a matter of proof from the borrower. The party sitting there at the other table in the courtroom with a file full of this information is the one who has it — and the burden of proof. Your case is all about the fact that the information was withheld and you want it now. That is called discovery. And it is in motion practice that you’ll either win the point or lose it. If you win the point about proceeding with discovery you have won the case.

You still need as much information as possible about the probability of securitization and the meaning it has in the context of the subject mortgage. But just because you don’t have it doesn’t mean the pretender lender has proved anything. What they have done, if they prevailed, is they blocked you from getting the information.

By rights you shouldn’t have to prove a thing about securitization where there is a foreclosure in process. By rights you should be able to demand proof they are the right people with the full accounting of all payments including receipts from insurance and credit default swaps. The confusion here emanating from Judges is that particularly in non-judicial states, since the borrower must bring the case to court in the first instance, the assumption is made that the borrower must prove a prima facie case that they don’t owe the money or that the foreclosing pretender lender is an impostor. That’s what you get when you convert a judicial issue into a non-judicial one on the basis of “judicial economy.”

In reality, the ONLY way that non-judicial statutes can be constitutionally applied is that if the borrower goes to the trouble of raising an objection by bringing the matter to court, the burden of proof MUST shift immediately to the pretender lender to show that in a judicial proceeding they can establish a prima facie case to enforce the obligation, the note and the mortgage (deed of trust). ANY OTHER INTERPRETATION WOULD UNCONSTITUTIONALLY DENY THE BORROWER THE RIGHT TO A HEARING ON THE MERITS WHEREIN THE PARTY SEEKING AFFIRMATIVE RELIEF (THAT IS THE FORECLOSING PARTY, NOT THE BORROWER) MUST PROVE THEIR CASE.

How to Buy a Foreclosed House: It’s a business — it’s an opportunity— it’s a risk

The way the media tells it, there are million of bargains out there that will be the house of your dreams and will make you rich. If it seems too good to be true, that would because it IS too good to be true. As a backdrop to this discussion remember that there are over 2 million homes that could be on the market but for the fact that the “owners” don’t want to flood the market. 2 million homes means there are too many homes for any foreseeable demand from buyers. That means that bargain prices are simply early predictors of where the market is heading. Those statistics, taken from over 500,000 homes reported and sampled, shows that the average “discount” is 15%-20%. In a normal market the discount would be real and relatively stable. In this market where we have 2 million homes already in the pipeline and around 3-4 million MORE homes coming it is not merely possible but rather likely that prices will continue to be depressed.

Add to that the credit crunch and the current environment where banks are reinstating underwriting standards where they verify the appraisal, verify your ability to pay, verify your history, verify other conditions affecting the value or future value of the home, and you have a seller’s glut with very little demand. Analysts from companies that maintain divisions employing economists now are estimating that it will take 6-12 years to clean up this mess. I think these estimates will change monthly until they give recognition to the fact that 10 years is about the best we could ever hope for, 30 years in about the worst case, and that the probable time will be something close to 20 years. That is 2 decades of confused downward price pressure, title errors, defects and defects, and figuring out how to undo the the chaos created by Wall Street.

That said, there are many reasons why you SHOULD buy a foreclosed home. First you SHOULD buy a home if you want to live in it — but beware that most people THINK they will live there a long time but frequently move within 3-5 years due to unforeseen circumstances. Financially, the likelihood that you will financially benefit from such circumstances is extremely low. Renting the same house or one just like it will probably cost no more than 60% of the monthly payment you would have even if you put 20% down payment. And you don’t get stuck trying to sell a house in a market that will basically be unchanged or worse than it is now.

Second you should buy a home on a short sale or otherwise, if you have capital and a good credit score and want to do something good. Let’s assume the house was originally bought for $450,000 and the buyer made a 20% down payment. So the buyer paid $90,000 PLUS all the improvements that are made, especially to a new developer tract house. So the sake of our example, the buyer now finds himself with a house that is currently “appraised” at $275,000. The “lender” refuses (actually lacks the authority because they are not really the lender) to modify the mortgage with a principal reduction, the terms are resetting so that the buyer’s payments are about to triple or have already done so. Assume they had no problem making the original teaser payments and could even pay more but not the absurd amounts called for under his current mortgage or deed of trust.

Let’s further assume the foreclosure has already taken place and the buyer is still in the home, awaiting eviction. With a little help from you and this post you get the homeowner to fight the eviction and start a confrontation where the homeowner is demanding discovery and is alleging a fraudulent foreclosure. Using average “discounts” you buy the house for $55,000 less than appraisal from the “bank” (actually a separate entity with dubious authority to have taken or retained title to the property since neither the forecloser nor the REO (Real Estate Owned) entity had one dime in funding the mortgage). So you have purchased the home for $220,000. Don’t get all excited. The original $450,000 price was false and even fraudulent. The next time that house sees $450,000 will be somewhere around the year 2040.

So now you make a down payment of 20% or $44,000. You have $44,000 into the deal plus whatever assistance you have the original buyer/homeowner. Your mortgage is $176,000. Using an amortization of 15 years fixed rate for 5%, your payments for principal, interest, taxes, utilities and insurance are probably going to be around $1250-$1350 per month. You give the original buyer/homeowner a lease requiring payments of $1600-$1700 per month plus a CPI (Consumer price index no less than 2% with no maximum) AND a pass through of increases in utilities, taxes etc. The lease is at least 5 years long. If you don’t have a homeowner willing to lease for 5 years, you are going to have trouble.

The lease is a net lease requiring the tenant to maintain the house. It renews automatically for additional terms of 5 years unless canceled with at no more than 9 months notice and no less than 6 months notice. Beginning with the end of the third year, the homeowners may have a two year option to buy the house at either the price you paid for the house, plus CPI or the current fair market value, whichever is higher. This option is good only in years 4 and 5.

You start negotiating with the “bank” or the REO with a demand for proof of title. See how-to-negotiate-a-modification

They will offer you indemnification, hold harmless and release. None of that means anything because most of them have either gone out of business or are about to go out of business. You ask “Who is the actual creditor here?” That will make them uncomfortable. You get rough and tough. And then you soften a little and use the procedure set forth below. Meanwhile the original buyer/homeowner starts threatening them because they obviously don’t have physical possession of the note or they have no rightful claim to ownership of it. The original buyer/homeowner makes demand and maybe even files suit demanding to know who the creditor is or was. This will soften up the game of the bank/REO.

Now let’s talk about how you are going to do this without being in the same mess that the banks, homeowners, title companies and others are in.

The attributes of a good solid purchase of a foreclosed home are:

  1. Warranty Deed
  2. Title Policy from large company without any exclusion relating to securitization of the prior owner’s loan. It would be best if the policy specifically mentioned securitization and stated affirmatively that there is no exception relating thereto.
  3. Friendly Quiet Title Action, in which the REO, the forecloser and all other known parties, at their expense bring a quiet title action naming the former buyer/homeowner and you, and naming John Does 1-1000 being the holder of mortgage backed securities who could have or who could claim an interest in the mortgage being extinguished by this deal. As long as the relief sought is ratification of the above deal and ordering the clerk of the County to remove the old mortgage and accept the new filings without any encumbrance other than your new mortgage and without any owner other than you.
  4. ONLY A FINAL JUDGMENT EXECUTED BY A JUDGE WILL GIVE YOU CLEAR TITLE. WAIT UNTIL THE TIME FOR APPEAL HAS RUN. INCLUDE A PROVISION WHEREIN YOU CAN RESCIND IF SOMEONE MAKES A CLAIM THAT THIS TRANSACTION WAS A FRAUD ON THE COURT WHETHER IT HAS MERIT OR NOT. IF SUCH A CLAIM IS MADE THEN AT YOUR OPTION YOU BECOME THE SUCCESSOR TO THE “BANK”  AND REO AND OTHER FORECLOSURE OR TRUSTEE SERVICES OR, AAT YOUR OPTION YOU CAN RESCIND THE TRANSACTION RECEIVING BACK ALL MONEY RECEIVED BY THE SELLING PARTIES TO THE TRANSACTION IN WHICH YOU PURCHASED THE PROPERTY.
  5. Indemnification from the forecloser
  6. Indemnification from the REO
  7. Hold Harmless from the Forecloser
  8. Hold Harmless from the REO
  9. General release from original buyer/homeowner
  10. Acknowledgment from your new lender that they were advised of the above and they agree that they will not make any claims against you for misrepresentation or misstatement based upon the securitization of the loan.
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