Mortgage Mirage

In a 4/14/09 WSJ article, Ellen Schultz recounts several heartbreaking tales of seniors losing their homes. Many lived on meager fixed incomes. Some had paid off their mortgages before unscrupulous mortgage brokers presented them with a “solution” to cope with higher medical expenses, taxes and other living expenses.

The American Bar Association puts out a free booklet of legal advice for families. In Chapter 9
they present some sage cautions regarding contracts:
“Fill in all the blanks! A contract with your original signature but containing blank spaces can be like a blank check if altered unscrupulously.” Some homeowners in the above article were bitten by this scam.

A homeowner taking out a mortgage whose payments escalate at a later date may not examine the contract closely after signing it, when the payments are affordable. A closer scrutiny at a later date may be too late.

“A contract produced by fraud is not automatically void. People who are victimized by fraud have the option of asking a court to declare that contract void, or to reform (rewrite) it. On the other hand, if they went along with the contract for a substantial period of time, they could lose their right to get out of it. This is called ratification, and is based on the idea that they have, by their actions, made it clear that they are able to live with the terms.”

“A contract can be canceled by a court because of fraud when one person knowingly made a material misrepresentation that the other person reasonably relied on and that disadvantaged that other person. A material misrepresentation is an important untruth. In many states, it doesn’t have to be made on purpose to make the contract voidable.”

Even if you know you were lied to, can you prove fraud? “Fraud requires an outright lie, or a substantial failure to state a material fact about an important part of the contract.” “Actual fraud that will invalidate a contract is a lot less common than people think.”

A well worn phrase may be more than just a rule of thumb but a legal precedent. “‘Caveat emptor’–‘let the buyer beware’–is a strict rule placing the risk in a transaction with the buyer.”

If all else fails, you may still have a chance of some legal remedy. “Courts have a powerful weapon called unconscionability . . at their disposal. Unconscionability means that the bargaining process or the contract’s provisions ‘shock the conscience of the court.'” However, “the courts are reluctant to use this weapon, but consumers have a better chance with it than anyone else.”

In handling my elderly parents’ affairs the past two years, I was surprised at the amount of mail solicitation they received that was targeted specifically to retired people. These included a variety of fixed income solutions from annuities to reverse mortgages. Some were legitimate, some smelled fishy. There were investment opportunities of many forms – in real estate, in stocks and bonds, in gold and other commodities. There were many offers for supplemental medical insurance.

The majority played on two real fears that older people have: what if I run out of money, and what if something bad happens? The marketing departments at companies large and small know these fears and cast their mail campaigns like large trawler nets. It’s up to us to be smart little fishies.

2 thoughts on “Mortgage Mirage

  1. Anonymous says:

    And the credit card companies trawl as well. Another target is the disability community. It may not be fraud, but it is unconscionable (or however yo uspell it) to offer an adjustable rate mortgage to a person on a fixed income. L.

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  2. Steve Stofka says:

    The “technical training/college” industry had many abuses until new regulations were implemented I think sometime in the early to mid nineties. No longer could a “career counselor” sign up a student with Federal loans and student aid and the salesman/counselor get paid up front. According to someone I knew at the time, they got paid about a quarter of the commission at sign up and were not fully paid till the student had completed half or more of the coursework. Most of the abuses stopped. Salesman would sign up only those that they thought would stick with the program. It also motivated salesmen to follow thru with the students they had signed up and get them help if they were having difficulty with a class.

    Mortgages are much longer term than a semester so the same payment delay could not be done with mortgage brokers. the mortgage company originating the loan would be required to hold some part of the mortgage on their books, say 20%. Mortgage brokers could be charged a delinquency holdback fee that would be put into escrow and earn interest. If a loan is performing after 5 years or the house is refinanced or sold, the broker would be paid the balance. 5% would not be unreasonable. On a $20K commission, the broker would have $1K held in escrow. It would eliminate “fly-by-night” mortgage brokers who came into this last market boom, made a lot of money by falsifying applications, then were forced out of the business once the housing market started to implode.

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