The worst mortgages

Payment option arm customers need relief from these toxic loans

April 13, 2009|By Phillip R. Robinson

The menu of subprime mortgages that helped lead thousands of Marylanders into foreclosure is infamous. There were the loans with attractive introductory rates that left homeowners to put off until tomorrow the bigger payments that would eventually overwhelm them, and the no-money-down mortgages with the "too good to be true" veneer. The 800 Maryland lawyers who have volunteered to help homeowners as part of the state's foreclosure prevention project have seen the impact of those loans firsthand. But now they are bracing for the fallout from the most toxic loan ever conceived: the payment option arm loan.

This allows borrowers to pick their payment each month from three options. These include:

* a minimum teaser payment that represents just a small portion of the accruing interest each month, with the remaining interest added to the principal loan balance;

* the above market, interest-only payment; * a fully amortizing payment of interest and principal.

The "bait" used by mortgage originators for the POA loans was that homeowners were qualified for the loans based on the teaser payment and were unfairly led to believe that the loan was suitable for their short- or long-term situations. The POA loans are so toxic that two of the largest national mortgage lenders selling and marketing these loans are now out of business - IndyMac Bank and World Savings.

Through new state laws and federal regulation, these POA loans are now mostly illegal and, one hopes, will never reappear in the marketplace. But thousands of Marylanders who were unfairly and deceptively sold these loans are stuck in the conundrum of staying current on their mortgages, which now exceed the value of their homes, or ruining their credit by just walking away from hopeless situations and letting their homes go into foreclosure.

Consider for a moment the story of my Charles County client who was illegally tricked into accepting one of these loans as she entered retirement after 30 years working for the federal government. The company that arranged the mortgage promised that her payment would be fixed at a low interest rate and payment for just a few years - and even left a recording on her voice mail verifying this. She believed that this payment would allow her to build up her home equity for the five years of the teaser term and keep her payments low as she adjusted to a fixed retirement income.

But the documents related to this loan were so conflicting and incomprehensible that Montgomery County Circuit Judge Joseph A. Dugan Jr. ruled the loan and transaction unfair and deceptive under the state's Consumer Protection Act and awarded her $13,000, which she has only recently collected. This 2008 ruling was the first time a Maryland court has declared a POA loan unfair and deceptive.

But, unfortunately, the story does not end there.

It is now eight months since her trial last summer. Real estate has completely tanked and both Presidents George W. Bush and Barack Obama have struggled to figure out ways to help homeowners in distress.

My client's situation has only gotten worse - her loan balance has continued to increase and now exceeds the fair market value of her town house by an estimated $70,000. More than 170 similar town homes are also on the market in her community, making a sale of the property difficult.

She cannot refinance to a safer loan because the payoff of her mortgage exceeds the home value. And she is fed up with the house, her loan, and the system.

We tried to get her loan modified through the FDIC's "model" modification system, but she did not qualify - she is current on her mortgage.

So, what exactly are my client and thousands of other homeowners supposed to do in this situation involving toxic POA loans? Through its state-sponsored workshops with homeowners around Maryland, Civil Justice Inc. has found that the number of POA borrowers is increasing in droves.

Even when a borrower has a lawyer and is current on a mortgage, the present system has created a losing battle against an unknown Wall Street mortgage-backed security trust that has packaged the toxic loan with thousands of others in the Ponzi scheme that has brought down our economy.

More needs to be done to help homeowners like my client who were unfairly sold the most toxic loan available. The entities on Wall Street that created, facilitated, and willfully blinded themselves to the loans they were selling should be forced to help provide meaningful, sustainable solutions to homeowners stuck with these toxic POA loans. To do nothing means there will be more walk-away foreclosures where borrowers give up and allow their perfect credit to be ruined through foreclosure.

If we do nothing to help, all of us end up paying through decreased property values, higher property taxes, and higher crime rates related to foreclosures.

Phillip Robinson is executive director of Civil Justice Inc., which is organizing the Foreclosure Prevention Pro Bono Projects. His e-mail is

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