Wed 27 Jul 2011
I blog about a range of things here – mostly environment, globalization and development. As a result, I have more than a passing interest in various global markets: food, carbon, and various natural resources. I’m also interested in the financial products being generated in these markets, and the ways in which they might impact the Global South. So I’ve had a tangential interest in the mortgage markets, if only because that particular financial swamp is so deep and murky that it remains an anchor on major lenders, which in turn contrains their lending activities and therefore influences these global markets. But I never really thought about the mortgage debacle as something that mattered in my financial portfolio – after all, my wife and I have excellent credit, have never missed a mortgage payment, and have only ever refinanced to lower our rate. We were supposed to be the model borrowers.
Yet somehow, in the fall of 2008, my wife and I became embroiled in some sort of shenanigans during a refinance of our mortgage with AME Financial. I did not know about these issues until a few days ago, when our current effort to refinance turned over the rock under which they were hidden. So what follows is one person’s account of how a mortgage can go weirdly wrong, even when you are diligently reading the documents and asking questions all along the way:
Recently, in an effort to take advantage of the really low rates, my wife and I initiated a refinance of our house. We were looking at a very good rate – 4.5% without buying points, and 4.375% if we bought a point. This would have lowered our monthly payment significantly, so much that it made seeking a refinance a no-brainer. We shopped around and settled on a mortgage broker that we felt comfortable with, and proceeded to move on the paperwork. Everything was going smoothly (though I must say, refinancing now is quite different than before the crash – the sheer volume of supporting documentation required is huge), when suddenly I received an email from my broker, asking me to call him. When I got him on the line, he was very apologetic, but told me that their analyst had found something that was going to be a problem.
Basically, the analyst found that my previous originator (AME Financial) had prepaid the private mortgage insurance (PMI) on our loan. AME Financial had given us a somewhat higher rate and then covered our PMI in the form of (to quote our current mortgage broker) ‘single premium lender paid MI’. In his words:
Two of the most common ways of paying PMI is monthly or single premium. Should the borrower wish for the lender to cover the entire PMI in one shot (single premium), the lender will usually up the interest rate by 1/8th or 1/4th of a point and then cover the PMI for the borrower. The advantage that this brings to the borrower is that they don’t have to pay monthly PMI, but at the same time they take a little bit of a higher rate over the term of the loan.
Now, this is all well and good . . . except that AME Financial never told us that they were doing a single premium lender paid MI on our loan. That was NOT disclosed to us at any time, and our HUD-1 form does not list any prepaid MI. Instead, we received a PMI document outlining the payments we would have to make until we were below 80% LTV or until April 2010, whichever come first. It was an odd document, though, as our amortization schedule seemed to suggest we were under the 80% loan-to-value required to avoid PMI before the first payment. At closing, we were told that we could write whoever serviced our mortgage immediately, reference the schedule, and demand the removal of PMI. This does not explain how, on a loan where someone did a single premium lender paid MI, and where the amortization schedule suggested we were below 80% LTV we were being charged PMI, of course. If I made one mistake in this process, it was failing to grasp that I was being charged PMI on a loan whose documentation suggested there was no need for PMI. I am still kicking myself, as I have no idea how I missed this.
As you might imagine, we immediately started calling in to have the PMI taken off. Sadly, our mortgage was purchased by Countrywide, who was already a part of Bank of America. In late November 2008, I called them up, and asked to have the PMI taken off. They argued that the LTV was above 80%. I noted that the amortization schedule they had just purchased as a part of a larger contract had the LTV below 80%. They claimed they would have to dig up the documents to support this, and then stopped returning calls. Then they disappeared completely, as Bank of America seemed to take over servicing directly. It wasn’t until well into the spring that we figured out who to call at Bank of America about the PMI, since we still made payments to “Countrywide” for a while. Once we sorted this out, and I got someone on the phone, I referenced our schedule, and they claimed the LTV was above 80%. At first they just told me to call back, then they started arguing that there were three different values for the house listed in the mortgage paperwork (I have not seen any evidence for this). I reminded them that a) I did not have evidence for this claim and b) this wasn’t actually my problem – the PMI document was a part of a signed contract, and if they didn’t like the terms in that document they probably should not have purchased my loan. Bank of America rejected my efforts to have PMI taken off until April 2010, when we lawyered up and had our attorney send BoA a letter demanding the removal of PMI per our mortgage documents. Suddenly, the PMI came off the loan. I don’t regret waiting to lawyer up. My father was an attorney who lamented the overuse of the judicial system, and the only reason we did in the end was to ensure our PMI came off in accordance with our loan documents, as it seemed BoA was willing to ignore them otherwise.
Now, we were owed over $3000 in PMI that we should never have been paying, and that made me furious . . . but I am the son of a lawyer, and I know how much litigation costs. Had I sued BoA, I probably could have won a moral victory and broken even (legal fees would have more or less eaten up any award). So I let it go, chalking it up to the horrific circus that was the collapse of our economy in the fall of 2008, and the chaos that ensued as the banks picked up the pieces.
However, with the information I now have, I am newly enraged. This is a nest of a mess.
- Clearly, AME Financial did something shaky – we had an appraisal that put us below 80% LTV, which meant we did not need PMI. Yet somehow they originated our loan with what probably was a slightly higher rate, and did a single premium lender paid MI without disclosing any of this to us. That is bad enough, but it raises another question for me: to whom did they pay this MI? Did they just fabricate the single premium lender paid MI in the documents and charge me a higher rate, thus pocketing a better commission, or was there an actual payment that went to someone? Neither scenario looks good for AME.
- If AME was the source of this problem, what was going on with Countrywide/BoA? Why was it in their interest to keep me paying PMI, when clearly I did not need to be paying PMI?
I haven’t got the slightest idea how to untangle this, but it looks more and more like this has moved beyond the unethical and the incompetent.
Oh, and by the way, because of the single premium lender paid MI on my current loan, and because we are refinancing after less than three years, it appears that someone will have to cover that cost on my refi. This is happening even though I had fulfilled more than my obligation with regard to paying PMI, and the refi I am looking at comes without PMI on it. What does this mean? It means that 4.5% just turned into 4.875% so the broker can cover this cost. This increase in the interest rate, over the course of the loan, will cost us about $26,000 in extra interest ($208,037.55 at 4.5% to $234,433.75 at 4.875%). So not only did I pay an extra $3000 in PMI that I never owed, as well as whatever extra I paid monthly on my slightly inflated mortgage rate (probably about $60, or $1800 thus far), I am being hit with $26,000 more in interest payments over the course of this refinance . . . all because of whatever the hell it is AME did back in the fall of 2008. $3000 isn’t worth the hassle, but $30,000 probably is.
Folks, if my loan is screwed up, even in this small way, I have to wonder how many other lurking “small” problems like this are out there. No, people in my position won’t lose their houses, but this is still a drag on the economy. $30,000 could set up my kids’ college funds. $30,000 could be used on home renovations that put contractors to work and add value to the property. Instead, this money has evaporated into someone’s pocket, and will continue to do so for the next 30 years.
Anyone with ideas on how to get any of this back, let me know. Seriously. I am in the mood to make someone’s life difficult.