Here’s a question for you. If a lender gives a borrower a mortgage and the monthly payment on the loan is more than triple the borrower’s income, if the house goes into foreclosure, is it the borrower’s fault, or the lenders? Consider the story of Katherine Christensen of Gilbert, AZ. [Thanks L!]
She had bought the house with her husband in 1999 and completely renovated it, adding hardwood floors, faux-painted walls, a swimming pool in the back surrounded by palms and ficus trees. When the couple divorced in 2001, she kept the house and paid it off.
Then, in 2006, she did something that she now knows was a mistake. A loan officer encouraged her to put more than $530,000 into a high-return investment. He sent her to a mortgage firm next door to help her borrow money to close the deal. She took out a loan, most of her home’s equity, and invested it in a Canadian mining company.
By 2008, the mining firm had filed for bankruptcy. Christensen hadn’t recouped any of her investment.
She hadn’t had a full-time job since she stopped renovating rental properties with her husband. She had a small monthly income, but the monthly payment on her adjustable-rate loan was $1,600.
Christensen received a Notice of Trustee’s sale in January 2009. According to the Arizona Republic, this surprised her because she had been working with the bank:
[S]he had been working with someone at her mortgage-servicing company, sending in $500 a month because she couldn’t make the full payment.
Christensen thought she could work something out – reduce her payment, keep the house she planned to live in for the rest of her life, slowly pay back the money she owed. She was still hopeful the mining investment would return some of her money.
You have to wonder why she was surprised though:
She was stunned to be facing foreclosure, because she had just been trying to work out an agreement to make partial payments on her loan. But the people she earlier had talked to stopped returning phone calls, so she stopped sending them checks.
Personally I wouldn’t be surprised to be foreclosed on if I stopped making payments, but that’s me. Here’s another thing she said surprised her:
The amount she owed looked terribly wrong, tens of thousands of dollars more than she had taken out. And the firm trying to foreclose on her wasn’t the same bank that had given her the loan.
If she had read her loan docs, [Which I did.] she would have seen that the loan allowed for any unpaid interest to be tacked onto the principal amount of the loan. She was making reduced payments, so why be surprised if the amount was more? Additionally, in a world of securitized loans, there are a lot of folks who were foreclosed on by a lender other than the one that gave them the loan. There’s nothing really suspicious in either of these facts.
Christensen was suspicious though, and paid $1,500 for a forensic audit, which turned up several problems. I have bolded the one that jumped out at me the most.
One of her loan documents showed her interest rate set at 2 percent for 10 years, but a second document listed her interest rate at 8.1 percent; disclosure of the fees on her loan, almost $9,000, was filed a week after Christensen signed her paperwork. Christensen said she had never seen that document and had been told the fees would be much less.
Christensen’s income was listed as $14,880 a month on the loan documents. She said she provided her loan officer 2005 tax documents that showed her earnings were less than $500 a month.
The audit also questioned the appraisal for Christensen’s home, saying it was potentially inflated.
So Christensen had a monthly income of less than $500/month, but she took out a loan on her property with payments of $1,600? Continue reading If a lender gives a mortgage with a payment triple a borrower's income, who do we blame the foreclosure on?