Caught in a toxic mortgage
Meet the Olivers: good credit and low risk. So why are they in danger of losing their home? How to get deep in mortgage trouble in one hard lesson.
NEW YORK (CNNMoney.com) -- It seems surprising that Kurt and Vicki Oliver could lose their home to a bank foreclosure. They had great credit, long-term employment and excellent assets and income.
But their main problem wasn't a usual symptom of troubled borrowers: job loss, divorce, personal problems or health reasons. Instead, they say, it was a bad mortgage from a fast-talking broker.
It was done very neatly, according to the Olivers. They never knew what hit them until it was too late - the process was that confusing
"We thought we understood it," said Vicki, "but we only understood what they wanted us to understand."
What they thought they were getting was an interest-only, adjustable-rate loan, where only the interest had to be paid for the first five years at 1 percent for the first year and no more than 4 percent during the first five years.
That would immediately lower their monthly payment from the $1,800 they were paying - which included escrow payments for property taxes and mortgage insurance - to about $1,100 and then to about $1,350 when the rate gradually rose to 4 percent.
Instead, they say, their interest rate remained at 1 percent only for the first 30 days, and then their payment quickly ran up to $2,100 a month.
In early 2005, when they bought their three-bedroom, one-and-a-half-bath ranch house for about $235,000 in Bangor, Penn., they were solvent and comfortable with a near six-figure household income. They were newlyweds, each with adult children from previous marriages.
They put a lot of money down on their home - about $130,000. Even today, they say they've never missed a house payment.
Nearly a year after they bought their home, Kurt's mom fell ill with Alzheimer's disease. Vicki quit her job to take care of her and later started a home-based Internet business selling candle-related products. The couple took out a second mortgage to free up some cash.
Shortly after that, they say they received a phone call from an independent mortgage broker asking if they were interested in lowering their interest rate to 1 percent. Who wouldn't be?
"I was a little skeptical but I asked, 'How can we do that?'" said Vicki.
She said the broker made it sound like they were getting an interest-only adjustable rate mortgage (ARM) with a very low introductory teaser rate that would afford them some breathing room.
They say the term, "negative-amortization loan," wasn't mentioned, but that's what they got instead. That meant the Olivers weren't paying off any of the loan principal. In fact they weren't even paying the full amount of the interest, which meant the principal would actually increase each month.
The Oliver's loan, as they soon learned, had a true, stated annual percentage rate (APR) of 7.15 percent, so if they paid 12 installments based on the 1 percent payment rate, their balance grew by more than 6 percent a year. The APR on the new loan was also higher than on their old fixed rate of about 6 percent.
They never suspected anything was wrong with the mortgage until the statement arrived after their first payment, and the amount they owed had jumped.
"We called and left voice-mail messages with the broker," said Vicki, "but they didn't call back." She called again and again until, she said, she realized the Provo, Utah-based broker was avoiding her.
Making matters worse, the couple's mortgage servicer was American Brokers Conduit, a division of American Home Mortgage, which filed for bankruptcy protection earlier this summer. When Kurt solicited help from American Home, he said, "I got an email back. It said because of their circumstances they can't do anything."
A spokeswoman for American Home Mortgage told CNNMoney.com she couldn't comment on any individual cases and could not say whether the company was doing any kind of mortgage modification or mitigation.
After several attempts to make contact by phone, CNNMoney.com was not able to speak with the independent broker, and he did not respond to an email request for comment. When an attempt was made recently to access the broker's Web site, the page reads that it is "temporarily closed."
The Olivers say they don't have the cash to fund a legal battle, where they could make the case that they were victims of predatory lending.
Last Tuesday, the Federal Trade Commission issued a warning to lenders about "potentially deceptive" mortgage advertisements that give borrowers a false impression of the cost of home loans. The FTC has enforced rules in the past against such deceptive advertising and returned more than $300 million to consumers.
The Olivers' biggest complaint is how badly they feel they were misled. "The broker out-and-out lied to us," said Vicki, even on the Truth-In-Lending disclosure statement. On the Olivers' copy it states, "If you pay off your loan early you will not have to pay a penalty."
But according to the couple, an addition to their contract called for a penalty of six months interest if 20 percent or more of the loan was paid early.
At one point they put their house on the market, but the housing slump made it impossible to sell and get all their debt out.
The Olivers finally chose to refinance back into a conventional 30-year fixed, which they got last week from Countrywide Financial (Charts, Fortune 500). Their new rate of around 6.5 percent results in a payment of $2,155 a month, including mortgage insurance and property taxes.
That's about $350 a month more than they were paying before they got the phone call from the mortgage broker. But with the fixed rate they at least know their interest won't go up, and their balance will drop instead of rise each month.
And the fees and transactional expenses of refinancing twice: loan origination, credit report, underwriting, processing, application/administration and title insurance - plus the prepayment penalty of $7,500 - came to about $20,000, most of which was added to the principal.