Back in the day, if a borrower didn’t have a 20% down payment banks would issue the first loan for 80% of the value, along with a second, shorter length loan for the difference between a 20% down payment and whatever the borrower could come up with for a down payment. It seems absurd, but in retrospect it was all part of the subprime lending push to write as many loans as possible, and sell them off. Two loans = twice the money!
Then, when the rug got pulled out of the lending market in 2008 there were a lot of programs to consolidate (and even forgive) loans for people with predatory loans on homes they lived in. It sounds like these people were told over the phone their smaller loan was “taken care of”, which could mean many things. It could mean the loan was forgiven outright, or that the loan was rolled into a refinanced larger loan (which now had enough equity to avoid PMI, saving the homeowner money without actually forgiving any balances), or simply that the loan was deemed paused for some number of years. So, they continued to pay the first mortgage, while the second one was in some sort of limbo. Clearly the lender did something to it, since the homeowner received no statements, but it didn’t go away entirely like the homeowner was led to believe.
I don’t mean to shift blame here: clearly, their original lender didn’t process that paperwork properly, and ended up selling the original second loan to a shady company that deceptively hid the loan to make it seem like it was in default, while the homeowner had no legitimate way of knowing it was still there. But what we should learn from all this is that nothing is ever official until you receive it in writing. If those homeowners had received and kept any documentation their loan modification, that showed the actual status of that second loan, it would be a lot easier to tell that shady lender to go pound sand. And whenever anyone from a bank tells you absurdly good news, ask for a followup letter and keep it forever.
It’s another aspect of the whole industry being a mess. Loans sold on and on multiple times with the necessary paperwork lost in the shuffle. I remember hearing a few homeowners saved from foreclosure because the company that purchased their mortgage having none of the necessary paperwork.
Good summary. A lot of this was covered in the story but you have to read through a lot of fluff before you get to the bit about the actual mechanics of the situation. Another bit to mention, though, is that a lot of those 20% second mortgages had variable interest rates, and after the 2008 crash, the rates skyrocketed for a lot of folks. People were unable to make the suddenly much higher payments, which is why they sought consolidation/forgiveness in the first place.
But yeah. Always be aware of what you’re signing up for when you take out a loan, and get all the terms in writing. If someone tells you not to worry about making payments, make sure you get that in writing, too. I was lucky enough to learn this lesson a long time ago with a much less expensive asset. My wife and I bought an appliance on one of those no-money-down 0% interest financing deals. The fine print was that if you were late on a single payment by even a day, they immediately tacked on back interest for the full purchase price at ridiculously high rate. My wife thought she had mailed the final payment but it turned out she had miscalculated by one. We got a phone call the day after the last payment was due. On a balance of something like $50, we suddenly had a penalty of over $1000. I was pretty pissed but there wasn’t really anything we could do since we’d signed the deal.
Back in the day, if a borrower didn’t have a 20% down payment banks would issue the first loan for 80% of the value, along with a second, shorter length loan for the difference between a 20% down payment and whatever the borrower could come up with for a down payment. It seems absurd, but in retrospect it was all part of the subprime lending push to write as many loans as possible, and sell them off. Two loans = twice the money!
Then, when the rug got pulled out of the lending market in 2008 there were a lot of programs to consolidate (and even forgive) loans for people with predatory loans on homes they lived in. It sounds like these people were told over the phone their smaller loan was “taken care of”, which could mean many things. It could mean the loan was forgiven outright, or that the loan was rolled into a refinanced larger loan (which now had enough equity to avoid PMI, saving the homeowner money without actually forgiving any balances), or simply that the loan was deemed paused for some number of years. So, they continued to pay the first mortgage, while the second one was in some sort of limbo. Clearly the lender did something to it, since the homeowner received no statements, but it didn’t go away entirely like the homeowner was led to believe.
I don’t mean to shift blame here: clearly, their original lender didn’t process that paperwork properly, and ended up selling the original second loan to a shady company that deceptively hid the loan to make it seem like it was in default, while the homeowner had no legitimate way of knowing it was still there. But what we should learn from all this is that nothing is ever official until you receive it in writing. If those homeowners had received and kept any documentation their loan modification, that showed the actual status of that second loan, it would be a lot easier to tell that shady lender to go pound sand. And whenever anyone from a bank tells you absurdly good news, ask for a followup letter and keep it forever.
It’s another aspect of the whole industry being a mess. Loans sold on and on multiple times with the necessary paperwork lost in the shuffle. I remember hearing a few homeowners saved from foreclosure because the company that purchased their mortgage having none of the necessary paperwork.
Good summary. A lot of this was covered in the story but you have to read through a lot of fluff before you get to the bit about the actual mechanics of the situation. Another bit to mention, though, is that a lot of those 20% second mortgages had variable interest rates, and after the 2008 crash, the rates skyrocketed for a lot of folks. People were unable to make the suddenly much higher payments, which is why they sought consolidation/forgiveness in the first place.
But yeah. Always be aware of what you’re signing up for when you take out a loan, and get all the terms in writing. If someone tells you not to worry about making payments, make sure you get that in writing, too. I was lucky enough to learn this lesson a long time ago with a much less expensive asset. My wife and I bought an appliance on one of those no-money-down 0% interest financing deals. The fine print was that if you were late on a single payment by even a day, they immediately tacked on back interest for the full purchase price at ridiculously high rate. My wife thought she had mailed the final payment but it turned out she had miscalculated by one. We got a phone call the day after the last payment was due. On a balance of something like $50, we suddenly had a penalty of over $1000. I was pretty pissed but there wasn’t really anything we could do since we’d signed the deal.