"Voldemort Mortgage" and Its "Magical Mystery Mortgage"

As the mortgage mess grinds on, just as with body counts in war, we are getting to the point, as matters get worse, that the numbers don’t have the impact they used to or ought to. The forecast that housing prices may fall 30%, which would put over 40% of the US mortgages underwater, is now a possible outcome, not a scene from a financial horrowshow.

And even though many of the stories of the crisis have now assumed a ritual quality, with various archetypes forming (Hapless Borrower, Optimistic Bottom Fisher, Heinous Mortgage Lender), there are some accounts that are, well, unusual enough to merit attention.

This tale doesn’t score high in the schadenfreude or pity category, but it does serve to reinforce stereotypes about financial institution bad behavior, particularly if you place stock in old-fashioned ideas like contracts and legal procedures.

From Nathalie Martin at Credit Slips:

This site has had some fabulous posts about mortgage fees in Chapter 13 and mortgage services fraud. This is a short story about mortgage fees or funky interest rates, or perhaps just plain old fraud, in the context of the stripdown of a mobile home. Many of us know about negative amortization mortgages, ARMs that adjust up when the rate goes up, ARMs that adjust up no matter what happens, 2/28s, and a host of other exotics. I think, however, I have discovered a new type, one that has the same principal balance no matter how much money the borrower pays on the loan. I call it the magical mystery mortgage.

A client in our Southwest Indian Law Clinic had previously filed a Chapter 13, stripped down the mortgage on his mobile home from $28,570 to $12,000, paid $9,000 in principal toward the $12,000, then defaulted. The case was ultimately dismissed and the mortgage company (we’ll call it “Voldemort Mortgage,” just for fun) came back with a vengeance, threatening repossession or foreclosure, etc. We entered the case and were acknowledged by the mortgage company as the attorneys for the borrower. We then attempted to get Voldemort to take what was left on the bankruptcy payments, rather than insisting on the full pre-bankruptcy loan amount. They agreed, so we thought. In exchange for an extension, the client agreed to pay $1,400 up front and the remaining $1,600 over a period of roughly five months.

Before the terms were memorialized, however, Voldemort sent a loan extension agreement directly to the client for his signature, without first providing it to us for review. I go into all this just so you can see what goes on. It is not pretty. The loan extension agreement did not reflect the terms of the agreement as verbally explained to the client. Instead it set the balance of the loan due at $28,570, not the $3,000 we had negotiated. We only discovered that the new agreement did not reflect the oral agreement, after Voldemort presented it to our client for his signature. Oddly the balance due, the $28,570, supposedly took into account the bankruptcy payments and a $1400 payment made by the client at the time of execution of this agreement. The client then made yet another payment of $800. The new balance? You guessed it…..$28,570.

We called Voldemort, and the student and I and finally reached someone in the bankruptcy department. The conversation went something like this.

Student attorney: We do not appreciate that you scared our client into signing something without our consent when you knew we represented him. You should never contact him directly. You know that right?

Silence.

Student attorney: We are really calling to find out how all the various payments have been applied. Starting out with the $9,000 paid during the bankruptcy….how was that applied? The principal seems not to have moved a penny (literally).

Voldemort: We bought these loans from Chase and they are so tricky. The borrowers have to make the payments in 30 day increments and if they don’t, say they pay on the first and a month is 31 days, the interest rate just skyrockets. Yeah…these are designed to trip people up and they do. It is hard to get ahead with these.

Student attorney: But how was the $9,000 applied?

Voldemort: To the interest. See…the trustee in the bankruptcy did not comply with the 30 day rule and the interest rate just went crazy during the bankruptcy.

Student attorney: Is this the bankruptcy department?

[my sentiments exactly. Since this is a stripdown or cramdown, the trustee clearly need not pay under this funky system…surely we had reached the Chinese culture department instead, right?]

Voldemort: Yes, this department processes all bankruptcies, why?

[explanation of the chapter 13 rules for stripping down loans, which were clearly as much as a mystery to this person as the principal calculations].

Student Attorney: We just want to know why the principal balance does not ever change. Please forward us all the loan documents and the payment history so we can see how this works.

Voldemort: Ok, but seriously, I told you why. Interest. Super-high interest. The rate is just so high, so high it is amazing, isn’t it?

Student Attorney: Amazing.

Niceties are exchanged and the conversation ends. So far, no papers explaining all this. I will keep you posted. This just confirms what you already know, namely that there are some very odd things going on in the mortgage world. Only a tiny fraction of them end up in bankruptcy. The rest are hidden from view. Call this high interest, or whatever you want. I am tempted to just call it not applying the payments to the loan. Is this legal? I assume no, but given the absolute lack of regulation of these things, it is possible that it is. Consumers can’t fight this kind of thing, at least without an attorney, something few in this boat can afford.

I don’t know if you fully appreciate what happened in that last paragraph. Here you have a card carrying, “defend the rights of the little guy” attorney reduced to saying that maybe, just maybe, the financial wizards had succeeded in creating a product in which, if you fell into the right trap, you never could pay down the principal. That’s a form of thralldom.