Friday, June 13, 2008

As If- the newest foreclosure scam

As if the mortgage/foreclosure crisis is not bad enough -it looks like it is going to get worse- and from a source that, had we been thinking, we would have realized was inevitable. I'll get to that in a minute.The average person hears in the paper and on the T.V. news that the current foreclosure rate is overwhelming, but it only takes a trip to the court house for the reality of those news reports to hit home. I was in the court house for over two hours yesterday on a foreclosure where I am representing the home owner attempting to get him some more time to work out a deal with his lender. The hearing I was in lasted 15 minutes. The rest of the time? In line at the foreclosure window of the clerks office. I was fourth in line but was behind three lawyers all with at least three file folder boxes filled with new cases. Only because a former student of mine who was third in line took pity on me and let me go ahead of her did I manage to get out of there after a mere 1 3/4 hours. My former student had her own file boxes of new cases to file and told me that by the time she got back to her office, there would likely be 100 new files opened.

As if the current waive of investor defaulted loans and subprime foreclosures weren't enough - we should start bracing ourselves for yet another new waive of foreclosures from what should have been an unexpected source- people with good credit who are current on their mortgages. Why would someone with good credit who is able to make their mortgage payments each month default on their loan? It is the latest mortgage scam - and when I say scam - I mean scam in the way of mortgage fraud. Who is doing this and how does it work? An example. Say you bought your small house in a nice neighborhood 4 years ago and paid $600,000 for it. You got an original loan of $540,000 and put in $60,000 in cash to close. Six months later, you got an appraisal saying your house was worth $700,000 - and you refinanced getting a new $630,000 mortgage, paying off your $540,000 loan, reimbursing yourself for the initial cash to close of $60,000 and getting $30,000 in cash back. This means that you have no cash of your own in the house. Fast forward a year or two, and your house is now worth $430,000. (I promise this is not going to turn into a math question having anything to do with what time the train arrives in Albany). You can stay in your house and continue to make payments on your $630,000 mortgage, acknowledging the fact that you now owe $200,000 more on your mortgage than the property is worth - or you decide to jump back into the market and buy a new house. After all, there are plenty of bargains out there, and you can move up from your small little house in the nice neighborhood to a big house in the neighborhood for less money than you paid for your first house - and with a lower interest rate on the new loan.

What's wrong with that you might ask? Well, in order to do that, people are representing to their lenders that they have a renter for either their existing house, or the new house, who will pay all the expenses. They indicate that the new, or old home will be held as an investment. The banks lend these people with the fabulous credit the money for the new house- they close on it and move in. The are now living in their dream house- and are going to stay put- so that sterling credit is not so important to them. So, and I'm sure you have already guessed this - they stop making mortgage payments on the tiny dream home and the lender for that house forecloses, further extending the foreclosure cycle and adding to the glut of homes for sale.

Sadly, given how quick government regulators were to catch on to what was going on in the subprime market, by the time this trend is noted nationwide, thousands of new foreclosure cases will have been filed.

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