Mortgage nightmare: How $30,000 loan can cost $92, 698 in interest after 5 years

Nation's Housing

Moral of story: Read lender's documents

July 09, 2000|By KENNETH HARNEY

Eichel's situation, first publicized in this column in early May, began more than five years ago. In order to do some repairs to her townhouse in suburban Los Angeles, she decided to borrow $30,000. Since she had good credit and a steady job, she figured that raising the money would be a snap.

And indeed, a loan officer from the first - and only - mortgage company she called drove out to her house immediately after their telephone conversation. Eichel admits she didn't pay a lot of attention to the details of the mortgage he described.

"He was very nice, and he seemed very interested in helping me," she recalled. "I didn't go over everything he gave me to read word by word."

But for Eichel's $30,000 mortgage, not only were there devils in the details. There were monsters. For her $30,000, she would have to pay more than $4,000 in commissions and fees. These would be rolled into the initial mortgage balance, bringing it to $34,049.

Although she would not have to pay back a cent on the loan until she sold her house, her interest rate computations would be unusual: During the first four years of the loan, the interest charged her could not exceed 13 percent. But on day one of the fifth year, she would have to pay her lender something called "pledged-value interest" - 55 percent of her entire equity stake in her home.

Though she recalls "some discussion" of interest computations, she says she "never thought that I could have to give away so much" to the lender. In fact, the fine print of her mortgage note describes the pledged-value interest calculation formula, but in dense language that would confuse even an experienced mortgage professional.

From 1994 until earlier this year, Eichel paid nothing on the loan and essentially forgot about it. But when she sold her house for $235,000 March 9, she was stunned by the settlement sheet. She owed the mortgage company the original $30,000, plus the $4,049 in fees, plus a $60 "statement fee," plus $92,698.50 in interest. The total owed the lender came to just under $127,000.

All that for a $30,000 loan five years before.

Eichel "was in shock" after seeing her hard-earned equity dollars - and future retirement funds - disappear out the door. At that point, her real estate agents, Tina and Eddie Bernard, began contacting state banking and real estate regulators to get Eichel help. Tina Bernard contacted the mortgage company, GMAC Mortgage Corp. of Horsham, Pa., but was rebuffed. GMAC, a subsidiary of General Motors Corp., had not been the original loan company. It had purchased Eichel's mortgage in 1995 from Freedom Home Equity Partners, which is now defunct.

Once Eichel's situation was reported in this column, however, things began to change. First she was invited to testify at a federal government hearing on predatory lending conducted by the Department of Housing and Urban Development.

Then ABC's "Good Morning America" program began preparing a feature report on her case. Just prior to the airing of that feature recently, GMAC Mortgage sent Eichel a refund check for $62,383.36.

The money, according to Rick Gillespie, a GMAC Mortgage senior vice president , represented the amount Eichel would not have paid had her loan carried a 13 percent interest rate, without the equity-eating component. Though GMAC had no legal responsibility to make any refund, "as an investor we have to accept some accountability" for the types of loans the company purchases, said Gillespie.

In Eichel's case, the loan she obtained "was not in [her] best interest," he said, because it was a reverse mortgage designed for much older homeowners who were unlikely to move for many years.

Gillespie added that the firm is examining 415 other mortgages on its books similar to Eichel's that it purchased from Freedom Home Equity Partners, and will make refunds to any other victims, capping their rates at 13 percent to 14 percent.

With her $62,386.36 check in hand, what does Irene Eichel have to say about her home mortgage saga? She's blunt: "I learned such a hard lesson. And I'll never have to learn it again."

What did she learn? You can't sign up for a home mortgage - any mortgage, whatever its size - without reading every sentence, every word, and asking questions. Get a lawyer to help you if you don't understand.

But don't be swayed by friendly loan officers who seem to have your best interest at heart. Because as Irene Eichel discovered, their interest may be very different.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W. Washington D.C. 20071.

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