If you make a mortgage payment every month, you’ve probably received, over the past five years or so, dozens of solicitations to refinance. The solicitor told you that your payment would be lower, that you would have no out-of-pocket closing costs, and that, with interest at historic lows, you would get the lowest rate available. The whole process wouldn’t take more than a few weeks, and the closing would be at your own dining room table.
If you took the broker up on the offer, somebody like me–a lawyer or notary–showed up at your door one evening with a sheaf of papers for you to sign. I’ve sat in on hundreds of refinancings over the past five years, and, as a lawyer, I’ve had a chance to assess the uprightness of lenders and their associates. Too often, the bankers have come up short.
The loan originator who took your application didn’t tell you that you were in a negotiation in which the bank was holding all the high cards. This person told you that he or she would be looking out for your interests, but it’s the bank that pays the broker, and a bigger profit for the bank means more money for the broker. The broker’s incentive is to set you up with the most burdensome terms you will accept as a borrower, all the while telling you he’s getting the best deal available. Sometimes, you don’t know what the deal is until the papers are put in front of you.
In the typical case, in the days when appraised “values” were on the rise, the borrower would “cash out” equity by increasing the size of the debt, often at a rate slightly lower than the one on the old mortgage. Not infrequently, the rate would be fixed for a couple of years and then become variable. Borrowers were not always told about the variable feature in advance, but I always let them know what was in their note (and I got in trouble with more than one lender for doing that). The ones that knew they were going variable were often told that they could refinance again in two or five years when the new rate kicked in, and maybe cash out a little more equity with the further appreciation of their home’s value. I always told them there was no guarantee that the broker could make good on that promise.
What actually happened was a decline in property values in most markets. With values falling, today’s loans tend to be fixed-rate, federally insured, with the borrowers mortgaged to the hilt, so that a further depreciation will leave them with no equity at all. Many of them won’t be able to sell for enough to pay off their loan.
I discovered in short order that the more you need the money, the more the loan will cost you. The lower payment promised by the broker is always more than compensated by the up-front costs. Not infrequently, the borrower is surprised by the bottom line, which can be thousands less than the amount promised by the broker, reduced by loan discount fees and other cryptically-captioned closing costs. There are no out-of-pocket closing costs, as promised, but the debt is inflated by financed sums that are taken right off the top by the bank and its associates. My $90 fee (or the $40 my wife, a notary, gets) is a minor item.
A borrower refinancing his or her residence has three days to reconsider. Federal law gives borrowers a right to rescind the transaction, but almost nobody exercises that option, and people usually sign even when they’re surprised by the terms of the loan or the bottom line. This is because they’ve made arrangements to pay off their old mortgage and, often enough, a bunch of other debts, as well. They haven’t budgeted for their regular monthly payment, and they are persuaded (not by me) to accept less because they have no other choice.
You can see that a loan broker or loan closer might get a little frustrated with my attitude on occasion, and many of them did. On the rare occasions when somebody refused to sign, I got blamed. Last month, I was dropped by the last of the lenders who were doing business with me. I’d had the moxie to discuss an error in the paperwork with the borrowers. Real estate lawyers have the option to move into the foreclosure business when the market goes bad, but I’m not that enthusiastic about putting people on the street, and there’s no money in defending foreclosure, given the infinitesimal likelihood of winning anything but a delay and the fact that the client is almost always broke. My practice is dead.
I’ll probably go back to criminal defense or maybe try some other business, but it seems as if my situation–not unique among real estate lawyers–is also an opportunity. If there were a federally-funded foreclosure defense clinic where I could use what I’ve learned about banks’ corrupt practices, I might be able to help a few people stay in their houses. Of the many trillions of dollars transferred by Congress and the Federal Reserve to the nation’s banks, I’m betting no small amount will be used to pay lawyers to put people out of their houses. Somebody in authority should take a piece of that money and put it into foreclosure defense. It would give defrauded debtors a shot at justice that they don’t have now, and it would give idle lawyers like me something productive and socially useful to do.