Homeowner Forum / General / July 2008

Loan prepayment penalty angers borrowers
By Jim Wasserman - jwasserman sacbee.com

Published 12:00 am PDT Friday, July 11, 2008
Story appeared in BUSINESS section, Page D3

http://www.sacbee.com/142/story/1075004.html

When Carol Wallace sold her Sun City Roseville home two years ago, she
got an expensive reminder from her lender.

She owed $5,964. Why? She had paid off her adjustable-rate mortgage
early.

The lender offered to waive it, Wallace said, if she'd buy another
house with one of their loans. But here was the point: She had cancer
and didn't intend to buy again. She had to pay up.

Two years later, still ill, Wallace still fumes.

"It's written in my paperwork when I die to remind my kids," she said.
"It says if there's a class action lawsuit, to remember me, to get my
$6,000."

On Monday, the Federal Reserve plans to issue new lending rules aimed
at limiting the exotic loans that fueled the current housing mess.
Among the Fed's likely proposals: a rule that lets future borrowers
escape prepayment penalties for 60 days before their loans reset to
new interest rates and higher payments.

Whether or not that idea comes to pass, it will be too late for
thousands in the Sacramento region who got loans that came with
financial penalties for paying them off early, usually in the first
two or three years.

Prepayment penalties made exotic loans attractive to global investors
because they guaranteed a return if borrowers opted out early. But
they also restricted borrowers options when the conditions under which
they were made – a rising housing market – went sour.

Since early 2006, Home Front has heard many stories of borrowers who
tried to refinance into safer fixed-rate loans but couldn't afford the
prepayment penalties that, in some cases, could be as much as $15,000.

When their penalty eventually lapsed, the borrowers were trapped. They
couldn't refinance because they owned homes worth less than they owed.

Count Robert Winward of Sacramento among them. He bought a house in
the Rosemont neighborhood in June 2005 with an adjustable-rate loan
that quickly threatened to hike his payments.

"I could have refinanced a couple of times," he said. "But what
stopped me from doing it was that it would have cost about $15,000."

When his penalty period ended, he was unable to sell and unable to
refinance, he said.

Winward is one of the luckier borrowers. His lender recently froze his
interest rate at its original level for five years.

Did he know he had a prepayment penalty in 2005?

"I didn't understand exactly what it meant," he said. "When we bought,
we were very naive."

Wallace said she knew she had a prepayment penalty. "But I didn't
think it would be a problem because I didn't think I would have to
move," she said.

Wallace said her son and daughter-in-law also paid almost $15,000 in
penalties when they refinanced out of their risky adjustable loan into
a fixed-rate loan.

Wallace, a former rehabilitation counselor and geriatric care manager,
believes prepayment penalties should be banned. Consumer groups like
the Center for Responsible Lending agree, at least for subprime loans
given to people with spotty credit histories.

So does a majority of the U.S. House of Representatives, said Paul
Leonard, CRL's California director.

"This is not a wild out-there proposal," he said. "This is a proposal
that most policymakers tackling this issue are adopting. It remains to
be seen if the Fed goes in that direction or not."

What does the lending industry think? Fred Arnold, president of the
California Association of Mortgage Brokers, said it still doesn't have
a position.

"They're very good for the consumer when disclosed properly," said
Arnold, president of American Family Funding near Santa Clarita. "But
we realize the consumer hasn't had the best disclosure."

Landlord 101

With so many investors picking up bank-repossessed homes in the
Sacramento region, cities have begun raising some questions about
whether the phenomenon will affect their neighborhoods.

In response, the Rental Housing Association of the Sacramento Valley,
a trade group for single-family home property managers, has scheduled
a July 19 seminar for investors.

The aim is to give prospective landlords a proper view of what being a
landlord means. The seminar will be at the Sacramento Hilton, 2220
Harvard St.

Details: (916) 920-1120, or www.rha.org.

IndyMac's local ties

Earlier this week the mortgage industry was consumed with the news
that IndyMac Bancorp. of Pasadena would stop making home loans and lay
off 3,800 employees.

But there was a story behind the story.

IndyMac's embattled Chairman and CEO Michael W. Perry has local
origins. Perry, born and raised in Rancho Cordova, got his start in
the mortgage business here in the region, said Jim Paterson, partner
and mortgage broker at Gold River-based Mortgage Consultants Group.

Perry, he said, won early respect as chief financial officer for the
now-defunct Commerce Security Bank, which once had offices in
Sacramento and Grass Valley.

Eventually, the bank put Perry in charge of its mortgage division,
where he supervised its residential lending operations.

Paterson said Perry built the bank's wholesale mortgage lending
division into one of the biggest in Sacramento. In the mid-1990s, he
caught the eye of Countrywide Financial's Angelo Mozilo. He recruited
Perry to Southern California, where the two started IndyMac.

Paterson described Perry as an "intelligent guy, very well- respected
in mortgage banking circles."