I took some time to put together some charts and details of what we just experienced with our mortgage. Why?
Thinking back I think I did it both as a creative-stress outlet as well as wanting to promote understanding. When you endure hardship caused by the intentional actions of an entity, you want people to understand what you experienced as a way to raise awareness and hopefully change public policy to prevent such hardships in the future. An “act of God” is one thing, but intentional predatory abuse is another.
I think there’s also some public policy issues here but I’ll expand on that at the end. Also before I begin I want to make it clear that this is neither sympathy nor charity seeking. Should you feel compelled to give something, there are plenty more in this world that are far more in need of assistance. Please consider them.
Our loan was originated at an interest rate of 10.8% plus – we paid an additional 3 points at closing – totaling over $12,600 of interest charges that were pre-paid at closing.
Why enter into a loan with such terms? The short answer is we had no choice, but the longer answer of events that led up to this is here.
Per the Truth in Lending statement our effective interest rate would be 11.293% and we would pay another $730,000 in finance charges over 30 years:
That $730,000 is almost 5 times more than what the property was just appraised for.
For comparison for the past 2 years the average rate on a 30-year ARM has been under 4.5%:
I wondered what these numbers would look like at normal interest rates, so I filled in the blanks using Zillow’s mortgage calculator:
Our initial mortgage payment was $3,291. A rate at 6% would mean a difference of $1,000 per month, and over $1,300 per month using current rates (3.74%).
Below is the same graph, but showing the total interest to be paid over full term (not including pre-paid interest).
Subtracting from the Truth in Lending statement we were provided ($730,000), the current rate of 3.74% would result in a savings of over a half million ($537,296) over the term of the loan.
When the loan was originated it was over 75% of net income. That’s right. For years we didn’t eat out or spend a single dollar on ourselves or our children on the premise that by sacrificing to show two years of timely payments we could later get a refinance (which we will see later that the bank prevented).
Just for contrast I thought it would be interesting to see what our monthly payment equated to in terms of other properties.
After modifications the mortgage payment would later increase to OVER $3,500, but for comparison purposes I used $3,400:
This home below is in the same zip code. Assuming no down payment, the Zillow listing estimates the mortgage to be $3,460:
And for fun here’s a RENTAL listing near Research Technology Park:
To add a bit more color to this, there isn’t enough space in our house for a table. I eat my meals kneeling before a small coffee table. There’s a sink, but no actual kitchen, the furnace is broken, the home is contaminated with mold, and in a flood zone.
So clearly something is off-kilter here. Now let’s look at appraisals and payments made.
We had a formal appraisal done this summer which put the home value at $150K. The bank did an appraisal in the same time frame for $240K but the bank’s appraisal compared with homes that were in a different county let alone not being in a flood zone. Needless to say we feel the $150K appraisal is more accurate, but even if you round off the difference at $200K things are not quite right:
In the first three years of the mortgage our total cash outflows (which includes escrow and taxes) was $98,000. In other words, if you accept our appraisal as an accurate valuation, we paid in 3 years almost exactly two-thirds of the value of the property.
Based on such an aggressive repayment schedule we should have some equity in the property then, right?
Not only do we have no equity but we currently owe the bank is $540,000. That’s right — over a half million dollars. When the foreclosure process is complete, the bank will have the option to come after us for the difference between what the bank sells the home for and $540,000 – which so far they have indicated that may do.
In other words, even though we paid the bank two-thirds of the value of the property, we lose all that AND the bank may likely pursue us for an additional quarter million or more.
Yes, you read that right, but do feel free to take a deep breath and go back and read that again.
Surely there must be a remedy for this right? I detailed in a prior post all the modifications that were available to us and how they turned out, but I’ll mention the HAMP modification (Home Affordable Modification Program) here which is a part of the TARP program. Over $45 Billion of taxpayer money went to finance HAMP modifications for homeowners that were “underwater” after property prices collapsed. Here is a Treasury Department article that claims HAMP helps underwater homeowners. I have no doubt it has helped many but it didn’t help us.
The HAMP program has guidelines that banks must follow, and the primary guideline is what is called a front-end ratio. The front-end ratio is the ratio between your gross monthly income and your monthly payment. The goal of the program is to reduce this front-end ration to between 31 and 38%.
During our application we detailed the fact that our home was underwater, the predatory lending, and our unusual cost structure due to having a special needs child. They asked for doctor statements and more about our hardship. We provided over 30 pages of detail and there is no evidence this information was looked at, nor were any of the doctors contacted.
The HAMP modification offered to us was consistent with the front-end rule and put us as exactly 38%. But it left our home underwater. How much would our payments be reduced by?
Our monthly payments were reduced by exactly $36. But that’s not all.
The HAMP program also ADDED an additional $37,720 in additional debt to be financed. The HAMP program took an already underwater mortgage and pushed it DEEPER underwater with more debt!
At a savings of $36 a month, it would take 87 years JUST to recover the $37K in new debt, let alone the entire mortgage. 87 years to pay back a HAMP modification on a 30 year mortgage that is already underwater.
But the bank followed the HAMP guidelines – they satisfied the front-end ratio. And herein lies the issue – there is plenty of room for banks to manipulate the system to do whatever they damn well please to homeowners and their families.
There is no consideration for the property being underwater in a $45 billion taxpayer program that was purportedly intended to help homeowners who were underwater.
“This loan is clearly predatory. Why didn’t you sue for predatory lending?”
Well two reasons. One is that the legal costs of going up against a major too-big-to-fail bank would have been between $30K and $50K. Since all our money already went to the bank, there was nothing left for this.
The other reason is that on the average about only half of predatory lending suits are successful.
We did hire a law firm and incurred thousands of dollars in legal fees, but in the end it didn’t matter – banks do this to thousands of home owners and they know how to manipulate every step in the process.
At one point we did get a hearing with a court appointed mediator. We came with our legal representation and a stack of paper to document our situation. We might as well not have been there. We were given no opportunity to present our case or condition. We were simply told that you must accept the bank’s offer or be foreclosed on.
We did accept the bank’s offer. We had to either make payments online or by phone. Once we entered our account info the website told us we had to call. So we called. And we called. And we called some more. When you call you have to enter an account number before you are added to a queue. Let’s just say after dozen of attempts we never did get through and we were late. We went to our attorney and naturally the bank’s attorney had no problem getting an operator at all.
[The bank manipulated many circumstances along the way ranging from retracting offer letters and playing dumb to sending time sensitive documents in a manner that made professional review impossible. Some of those details in this post.]
In addition to this we experienced a perfect storm of untimely liabilities. Because we were 2 weeks late on one of our payments, the bank indicated that they were no longer required to comply with the HAMP modification and moved to foreclose. The bank still has the option to sue us for the difference ($540,000 – bank sale price).
What was initially predatory lending became a self-fulfilling prophecy. How can anyone satisfy a 30 year loan when no escape hatch is provided from loan shark rates?
It’s hard to under estimate the injury here. The sacrifices we have made both financially and in time have been profound. I’ve lost years of time with my children spent either working additional jobs or working on our case itself that I’ll never get back. Same goes for personal and/or career development. And raising three kids and trying to keep up with a modern life style in these housing conditions is nearly impossible. Over a period of weeks, months and years it changes you and not in a good way. My kids were all developmentally delayed because there was no space to move, crawl or play.
But none of this matters to the bank. I do not know how many others go through a systematic predatory-to-foreclosure scenario with no escape option, but I know there are many who are currently going through foreclosure forced by the bank.
This is wrong. We say our banks are too big to fail, bail them out with taxpayer money and then we STILL allow them to do this with families with no cost-effective recourse in the court system. The banks and the government post-TARP are intertwined and are different heads of the same beast. In other countries there is a “loser pays” law for court costs, but in the US such a law does not exist for predatory lending cases.
There’s always gaps in any system and perhaps our case is unique, but that’s no excuse for banks to have the liberty to effectively destroy lives and families as a result of their manipulation of the post TARP system in America.