Explain how this could happen to a mortgage?

[grasswire]

As noted in this topic last week, the house we rent has been foreclosed and will be sold by the lender. The landlady has paid nothing on the mortgage since September. She sent 'round an e-mail a few days ago saying that she was deliberately withholding mortgage payments on her properties in order to force the lender(s) to recalculate the loans to lower interest rates. She said the rent was being held in a separate account and there was no danger that she was going to default.

That's all I know for sure. Rent skimming in California is a felony offense, but we are not in California and she may or may not be telling the truth to her renters -- she may indeed have the money in holding.

The lender's attorney tells me that there has been no communication about recalculating the loan.

I did a little nosing around on county records and see that the landlady paid $319,000 two years ago for the property but the papers from the court say that she now owes $386,000. What does this mean? How can someone owe so much more on a property after 16 months of making mortgage payments?

What am I missing?

[Statistical]

1. Cash out refinance?

Cash out refinance to take out equity gained in booming housing prices?

HELOC and then refianced HELOC debt into mortgage?

Option ARM?
They have ARM where you pay less than interest only durring the first 1/3/5 years if you make minimum payments the difference is recapitalized so the balance will grow but usually not that much.

Lots of crazy junk in real estate market.

I guess I am "ole fashion" got me A 30yr fixed. Make an extra payment a year. 4 years in the rates have dropped so low I refinance to 20 year fixed keeping payments the same but knocking 6 years off the note.

I don't think there is a need or use for all those crazy options.

[thunder rising]

5. I guess you're one of the few that have a right side up mortgage.

[Statistical]

14. Well only about one in four mortgages are upside down so it isn't that rare.

Many of those are not due to the crash but rather "tapping" the equity every couple years.

Someone who bought a property in say 1998 (10 years ago) should have 30% - 40% equity even with the housing crash.
Many don't because it was "free money" and used their houses like an ATM.
1) build up 20K in equity
2) get a HELOC
3) max HELOC and rate goes upward
4) refinance back at 95% LTV
5) repeat every 5 years.

Hopefully in the future people will realize that isn't sustainable and putting luxuries on a HELOC is not a good way to "get ahead".

Some people just got screwed. Many who bought in 2005-2007 with no money down essentially had no chance to avoid going under.

On the other hand I did buy at close to the peak however four things helped
1) bought from distressed buyer (they acted like bad renters in their own house and destroyed it)
2) aggressively pushed selling price to below fair market value
2) bought a fixer upper (and put in a lot of "free" sweat equity).
3) put 20% down.

Even with all that I barely stayed right side up.

[thunder rising]

2. It's a valid tactic. Some mortgage companies will not negotiate with an owner

unless they are near default. (How would I know this) If indeed she has kept the money in escrow, then there is no "skimming". How did the mortgage company notify you?

[grasswire]

4. certified letter from the lender's law firm

....and then another hand-delivered letter requiring a signature called "Trustee's notice of sale."

[rucky]

8. talk to the attorney and sign a lease with the lender. n/t

[thunder rising]

9. I'm in Florida, here an owner can reinstate the mortgage at any time prior to the gavel smack

by paying the past due payments.

There is generally an adjuster involved. The tactic requires the owner make NO contact with the mortgage company. So, the mortgage company may be obligated to notify you since they have nothing else to go on.

The tactic is in many cases "prearranged" with a wink and a nod. Simply withhold payment, for a specified number of payments and the mortgage company will then renegotiate. The trick really is not to make any other contact with the mortgage company, until the adjuster makes contact.

So, as long as she can show the rents are safe, what's the problem.

[grasswire]

15. well, the lender knows about the tactic now

Because I have been in communication with the lender's attorney. The paper sent here provided the telephone number for any questions about the matter, and I have spoken to her several times.

[truedelphi]

3. Is there a possibility that you can get your rent returned to you?

For those months that she didn't pay it towards the mortgage??

[grasswire]

6. no

And it's very likely that none of our $2500 in deposits will be returned either, if she lets the property go to sale.

[DURHAM D]

11. If she does not return your security deposit contact the AG -

landlord/tenant laws don't fly away when investor owners are in mortgage default. You should get it back.

[coalition_unwilling]

22. You may well be able to sue her

in small claims court for "reduction in services" for the non-working heater.

[rucky]

7. She made payments at a "teaser rate"

On an Option ARM, which means she paid the minimum - probably for two years - and her home incurred negative amortization in the process. The idea being that on the "float date", when she has to make full payments, she'd have gained enough in equity to refinance. Obviously, a few things have happened to the housing market and that didn't pan out very well. Now she's upside-down.

She's sadly misinformed about what happens when she doesn't pay her mortgage. The good news is that if you keep paying your rent, the bank will most likely let you stay there when they foreclose - until they sell the property. And a steady tenant may be more attractive to a wider range of potential buyers.

BTW: Those types of loans no longer exist.

[thunder rising]

10. This is not a fact, only one scenario. It is probably an ARM, but the teaser rate may or may have

happened. I have an ARM that had a valid rate, but the LIBOR went through the roof the month my interest was calculated and the mortgage went to 10%.

So, it's not always a scam.

[rucky]

12. But you don't owe that much more on the home...

If you're paying full interest. You'd owe about the same as what you borrowed, balance-wise, but have make higher payments after the float date.

[HamdenRice]

13. An answer to your specific question, why she owes more: arrears

If the mortgage started out at $319,000 then she was required to make payments every month. Early in a mortgage, almost all those payments are interest and almost none are principal. So those payments do not reduce principal.

If she failed to make mortgage payments, those payments become "arrears" or late payments. Arrears are added back to the principal balance of the mortgage, and interest is owed on them (interest on interest).

So the most likely explanation is that she has missed somewhere under $60,000 in mortgage payments and those missed payments plus interest on those missed payments, plus penalties have been added to the principal balance.

[grasswire]

16. I wouldn't have expected a reduction in principal...

...because I assumed it was a no down, interest only loan. But I am surprised that the body of the loan has grown so much. She tells us that she has never been late with a payment except for the deliberate withholding for recalculation. That may or may not be true.

[ipfilter]

17. She probably has a negam pay option ARM

where she pays only a portion of the interest for the first few months of the loan. The remaining interest due each month is added to the principle. With those loans the principle increases each month where the minimum payment was made. I think most of those loans will allow this to go on until the LTV reaches 115% or a specific period of time...whichever happens first. At that point they recast into fully amortized principle and interest payments with an adjustable rate. Your landlord has probably hit the LTV wall and her payment has recast, or her ARM has reset, or both. Those loans are a good way to commit financial suicide.

[grasswire]

18. insane

...and the opportunity existed for people to make a lot of money through equity skimming as long as the market continued to rise. This woman has multiple properties and is in default on them -- not just the one we are in.

We should have known something was awry from the get-go. Her son was doing the rehab work and all manner of promised work was never finished or finished very poorly. It appears that they did just enough to get a renter in and then stopped putting any money or energy into the property. The finish work is very poor workmanship.

We have been without heat in the 1000 sq ft second floor of the house for nearly two years, despite repeated requests for repair. The first day we moved into the house, we had a massive sewage eruption from the basement drain and learned after an emergency plumber came at night that the house was not connected to the city sewer line. The 6 foot hole in the yard from the sewer repair existed for six months until we called the city inspector. And on and on and on.


Of course, we could always have moved out, but the house is big and in just the right location. We made do, despite the fact that we are paying rent for a finished, well-kept up to code property and not getting it.

Point being, the landlady has not acted honorably from the get-go and we see that now.

[ipfilter]

I believe most of the negam loans were

written in 2006 and perhaps early 2007. I'm pretty sure 120% LTV was the max those loans could go negative before they would recast. $382,000 is 120% of $319,000. These toxic mortgages are hard to compute without knowing the specific terms of the note, but the dollar amounts and time frame look like very much like a negam option ARM was in play here. These are refereed to as "liar loans" because most of them were written with no documented income or assets. They were the tool of choice for flippers and would-be landlords. There were thousands of these toxic mortgages written and they are due to recast/reset right about now. This is the second wave of the mortgage tsunami that is going devastate the economy.

[truedelphi]

23. Yikes. I remember when those in ther mortgage industry

were trying to sell me on these types of things and were like"Every one is doing it; why are you conerned about them?"

Glad I walked away. And sad that so many others did not.

[Warpy]

19. You're probably missing refinancing

which was the way landlords turned their properties into cash cows after convincing a bank the money was to be used for capital improvements.

Your furnace suggests it was not.

My earlier advice stands. Start looking NOW. This woman is a flake and the sooner you're out of there, the better.

[grasswire]

20. yes, and I appreciated your advice

I'd like to understand what happened so I know when/if she is lying, because we're going to have to ride this puppy for several months in order to find appropriate lodging(s). The timing stinks.

[Warpy]

21. I think you can tell she's lying

every time her lips move. In the meantime, consider putting your rent into your own escrow account. Just get out as soon as you can.