Mortgage Mess... or how I saved my home from foreclosure, at least for now

As one can see from my prior very-long-winded post about the so-called housing bill, I'm more than a little interested in the how the mortgage industry in our country operates.  My own personal experience, which I'll share now, perhaps will help not only illustrate just how screwed up the industry is, but also, how even the smartest of persons can end up with a mortgage nightmare.  Maybe it will save a few of you some grief in your own lives.



First off, I purchased my home, my first home, in 1999.  I must have spent at least two years researching, learning, and, of course, saving money, to buy my first home.  I knew I would have a bit of a credit problem, because at the time, I didn't have any credit!  Yes, I am one of those bizaare, sick and twisted people who, at that time age 35, had never had a credit card.  In fact, I'd never had a car loan either, or any other type of credit.  How very un-American of me... to pay cash for everything, and never buy anything I couldn't afford.  I know.  Anyway, I did have a credit report, but it was blank, with only my employer (myself, actually, since I was self-employed at the time) and my address.  Oddly enough, I did have a credit score - 680, which kind of flabbergasted me since I had no credit history!

I decided that I wanted to buy a house for NO MORE than $120,000, because that way even if my business failed or something happened, the payments would still be (barely) affordable even if I got stuck taking some minimum-wage job.  Eventually, I found an adorable house that was my dream, and way below my dream price at only $72,000.  It was, in fact, in foreclosure itself, and appraised at $105,000.

So anyway... by January of 1999, I had saved up a little over $23,000 to use as my down payment, took me about 4 years to save up that much.  Mind you, I only earning about $32,000 a year at the time, but it is amazing how much you can save up over a few years if you have no credit cards or car loans to pay!  Yea, I know... how un-American of me!  I contacted my local bank first for a mortgage, but they could not approve me because I had no credit, and suggested I use a mortgage broker, who could use "alternatives" to establish my credit history, such as my utilities and rent.  Calling friends and various business associates of mine, I found a mortgage broker who I felt was at least reasonably honest and would be willing to work with me.  That mortgage broker was actually quite wonderful, but she, too, had a great deal of difficulty getting me into a mortgage.

This was very frustrating... I had what I'd been told repeatedly was a "good" credit score of 680, I had stable employment - had run my own business by that time for more than 6 years, and a big chunk of change - $23,000 - for a down payment on a house that was selling for only $72,000.  I had no late payments on my utilities, my rent, I'd not bounced any checks and had a great history with my bank.  I was making  about $2,500 a month in income, and the estimated payments on a loan this small were well below the 25% of income that mortgage companies like to keep payments at.  I wanted a fixed-rate mortgage for 15 years.

So why, after sending my paperwork to twelve different mortgage companies could my broker not get me a loan?  Well, oddly enough, it wasn't because I had no credit history, it was because the loan was too small. Over and over again, my mortgage broker was told to suggest to me to buy a bigger home, use a smaller down payment, or take out some equity to do some work on the house, anything at all, to get the loan OVER $100,000.

Ridiculous.  Seriously, ridiculous. I'm trying to buy a house SMART, by buying not only what I could afford, but much LESS than I could afford, I'm trying to buy a house with a huge down payment that I struggled and scrimped and did without for four years to save up, and I'm being told that these are NOT good decisions! What the heck?!? To say that defies logic is an understatement.

Anyway, like I said, my mortgage broker was really wonderful, and not only did she agree with me that this was nutso, but explained - repeatedly - that people who are smart with their money are not profitable to the mortgage lenders, that people who borrow only what they need are even less profitable, etc.  In other words, being smart with my money makes me unprofitable which for some bizaare reason, makes me a credit risk.

Grrr... frustrating, to say the least.  Anyway, eventually, my mortgage broker got me a loan through Countrywide.  Unfortunately, it wasn't the greatest mortgage, but at least it was a mortgage.  30 year term, adjustable rate, fixed at 10% for the first 3 years, then adjustable every year afterwards.  Pre-payment penalty if I paid off the loan in the first 3 years.  "Non-conforming" loan.  Of course, they would NOT let me use all of my savings as down payment, I had to borrow at least $55,000, which I did.  My mortgage broker advised me to use the years until the first rate adjustment to establish some "real" credit, and then refinance to a "better" loan. Not great terms, but very affordable at about $540 a month.  I managed to pay extra principle every month, too.  At the 3 year mark in 2001, my rate adjusted to... 10%!  LOL!!  because the prime rate was still quite low.  But then the prime rate adjusted upwards (the Federal Reserve decided it was smart to raise interest rates because the economy was hot... so let's make the cost of credit more expensive and make everything more expensive... go figure... whatever) but anyway, at the four year mark, I was looking at my mortgage rate jumping to 13%.

Now, for most of us, it would sound like getting an adjustable rate mortgage at 10% is my first mistake.  Actually, that wasn't a mistake.  Even at 13%, my mortgage payment was only going up $2.40 a month, because I'd paid down so much of the principle - my principle was down to about $41,400.  My first mistake was obsessing about the interest rate.

Following the advice of my first mortgage broker, I decided to refinance, so I called her but she was no longer in the business.  She referred me to another mortgage broker that she said she trusted and would work well with me.  Following the advice of my prior mortgage broker, over the prior four years I'd established some "real" credit, with a few Capital One and other credit cards that I paid off in full every month and a car loan that I used my money market-savings account as security for, so it was at a ridiculously low 4.4% interest rate, with the car payment plus extra on the principle taken automatically out of that same account (and my savings account was earning an average of 5.25%!)

Actually, I paid cash for the car, then went to my bank and took out a $4000 loan on it, put that money into my money-market savings account to pay the loan off.  Very smart, I thought :)  Regardless, I'd got some credit.

Here is my second mistake: Even though I really researched and taught myself everything I could about credit reports and credit, I assumed that credit scores and credit reporting was based in logic. It's not.  Paying your accounts in full monthly doesn't translate into a good credit score.  Getting a Sears card, like I did, and using it only once (bought a new stove) then paying it in full that next month and not using it again for the next three years does not translate into a good credit score.  And more importantly, not understanding how Capital One reported credit limits really doesn't translate into a good score.  Before I started getting credit, my score was 680.  When I went to the new mortgage broker, she informed me my credit score was 630.  HUH? What? How could my score go down? I had nearly four years of perfect payment history!  I had five credit cards total - 3 of them Capital One - and a car loan of $4,000 that after one year, was down to about $1200 balance. This simply wasn't logical to me!  But my mortgage broker told me that my "credit utilization" was very high - something like 80% - and that my credit history was "too new" because it was less than 4 years old.  The "credit utilization" being so high took, no joke, almost another four years to fix, but was simple:  At that time, in fact, until just late last year, Capital One did NOT report credit limits.  The credit bureaus, when there is no limit reported, use your balance as your limit in calculating the credit score.  So if you have a $100 balance, the score equation assumes your credit limit is $100, and therefore, you are using 100% of your available credit, even if your credit limit is actually $5000, which mine was.  Capital One did this as a matter of policy for years, in order to artificially retard their customer's credit scores, making it difficult for them to jump-ship to a better credit card company.

If you have read this far, you MUST, RIGHT NOW, go get a copy of your credit report.  Make sure all of your credit card companies are correctly reporting your credit limit.  Capital One supposedly now reports credit limits, thanks to the class-action lawsuit Experian vs Harris, but I have heard from others that some other companies are still not reporting credit limits. Go to annualcreditreport.com - the only official site to get your legally mandated once-a-year free copy of your credit report.

So anyway, through all of that, with many thanks to the new mortgage broker, I learned that credit scores are based far more on how profitable you would be as a customer, not on how good a credit risk you are. A customer who carries a balance and pays only the minimum, or a bit more than the minimum, every month, is considered a better credit risk - a more profitable customer - than one who pays in full each month, and will actually have a higher credit score.  No joke.  Customers with high credit limits who don't use them, on the other hand, face the double-edge sword of low credit utilization (which raises your credit score) but also the risk factor that you MIGHT use all that credit one day, putting you deeply into debt and making you, therefore, a default risk... go figure.

But anyway, I had credit... and my new mortgage broker jumped through a few hopes to get me into a "good" loan.  This leads me to my third mistake: I refinanced a loan I should never have refinanced, even though it was now at 13%. That may sound illogical, but it's not, and you'll see why as I publicly admit to what will end up being the stupidest mistake I ever made in my life:  I listened to my mortgage broker. By that, I mean I believed what she said was true.

And here's what she said:  She told me the only way I could get a refinance was to take out a bunch of equity in my house and to get that loan through what was then called Ohio Savings Bank, because they were an "A" lender, so I would have an "A" loan, and that would raise my credit score.  Furthermore, she recalculated my monthly income based on my combined savings and checking account balances, so that my income would be about $5400 a month (instead of the then-current earnings of about $2100 a month, since business had slowed down over the prior year).  Oh, and to use HER appraiser, and accept his appraisal of $146,000 on my house, and take out 80% of the value of my house in the new loan, or $115,000, fixed at 30 years.  Even though realistically, my house was at most worth $105,000 based on the local market.

Mind you, I just wanted a straight refi, into a fixed 15 year loan.  She couldn't do that, and said that there was no way to refinance only $41,400.  Just no way.  Nobody loans mortgages less than $80,000, anyway.

Which, of course, as I know now, is bullshit.  It is true that it can be difficult to get a small mortgage, but lots of companies do.  However, the broker's commission is, of course, a lot smaller, so they are going to push you into the most expensive possible loan they can talk you into.  Like me, the idiot, did.  But anyway, being the smart person I am, duh!, I jumped at that, and said well then, I'll take out some equity, but write up the mortgage for only $80,000, 15 years.

She calls me back a few days later, says the best "the underwriter" can do is $80,000 for 30 years, adjustable rate of 7.25% fixed for 3 years, adjustable each year after that, and that it won't adjust more than 2%.  When I asked about that maximum 2% adjustment, she told me that meant my loan could not adjust more than 2% total, that I was looking at a total maximum rate of 9%, which was still better than my existing loan.  And once again, it's an "A" loan, so that's real good for your credit rating, and much better than that 13% interest you're now being raped by.

I thought about it, read everything, showed it to a few friends, I even showed it to another broker who actually said to me it was a "good deal" considering my "low" score of 630 and decided to go for it.  $80,000 at 7.25%, I was looking at a payment of about $545 a month, just a few dollars more than I was paying already, so I refinanced.  I did catch at closing that the 2% maximum adjustment was actually 2% maximum in any one year, she said that would be fixed later when I got my final loan docs.

Well, it never got fixed.  My refinanced mortgage can actually go to a maximum of 13%.  And my payment wasn't $545, it was actually $638, because my new loan required an escrow account for my homeowner's insurance and taxes, something my prior loan with Countrywide didn't.  I'd been paying my homeowner's insurance and taxes myself every year, out of savings that were earning interest.  Now, I was going to have to pay extra on my mortgage each month, to 120% of my total insurance and taxes to the mortgage company where it would sit and not earn ME any interest at all; in other words, not only was I not earning interest on that money, I was also losing out on the interest of another 20% of it - about $300 a year - because I had to have a "float" in my escrow account.

An escrow account, I might add, that has been miscalculated every single year since I refinanced back in 2002.  EVERY YEAR, I've had to spend hours on the phone getting my escrow payment adjusted and corrected, because some idiot in some out-sourced company can't do simple math.  But I digress, that's a story for another day...

So back to my refinanced loan.  Here's my fifth mistake: I should have taken all that equity I took out of the house and put it right back onto the refinanced mortgage immediately, as one big payment.  But I didn't, why?  Because I, again, followed the advice of my mortgage broker, who said I should put it in my savings and let it earn interest, and that besides, it was good for my credit.  Besides, why give it to the mortgage company when it could be earning me interest?  And, let's not forget, one of the biggest misunderstandings in income tax history: I'd lose a bunch of my mortgage interest tax deduction!  Want to keep that as high as possible, right?  Wrong!

You see, if I put that equity I got - which, after all of the closing costs (yes, I was totally screwed over on those, too, overpaid by nearly $3,400!) and other fees into my still-paying 5.25% money-market savings account, I would have earned about $2,100 in interest the first year.  TAXABLE interest income, mind you.  But here's the math, and it's estimated to keep it simple:  My income plus that interest earnings left me paying taxes about $4300, after I used the interest deduction, my tax bill was $3800. I earned $2100 in interest, but only saved $500 in income taxes.   HOWEVER... if, for example, I spent that $36000 in equity instead of investing it, my income taxes would have been about $4000 - $300 less - and my tax bill after interest deduction would have been about $3400, about $600 less.  So I actually would have saved more in taxes by not investing the money, but my income would have been slightly higher... anyway... no biggie.  But the biggie is that by paying around $6000 in interest to my mortgage company, I could saving about $500-$600 a year on my income taxes.  I don't know about you... but I can think of much better returns on investments.... spending $6000 to save $600??  Go figure.

Now... if I followed my own gut instinct, did what *I* thought was the "smart" thing to do, I would have put that $36,000 in equity right back on the mortgage.  And if I did, I would have only paid $3,433.74 in interest that first year, AND knocked a whopping ten years off of that 30-year mortgage if I never made a single extra principle payment!  And, when my rate adjusted at the three year mark, I would have had a REALLY low payment, barely $400, including insurance and taxes, even though my rate jumped to 9.25%!  I would have saved more than $12,000 in interest payments just in that first three years!

DUH!  I listened to the so-called experts instead of my own logic, my own gut-instinct.

But that's not what I did.  I followed the advice of my mortgage broker.  Put the money into savings, ended up paying a total of $6,958.80 in interest that first year, and at the end of the year, my mortgage was down to a whopping $78,975.17.  As it turns out, I wasn't able to make any extra principle payments at all that year, because my slowing-down business ended up failing complely.  In fact, that $638 a month payment was becoming a real struggle to make, but I was making it, although I was having to hit the savings every month a bit to make it.  I should have stayed with my old loan...

Now, you might think I should be glad I had that money in savings to help me when things got tough... and to a small extent, I am, but you have to look at it logically:  I was using money I borrowed to pay money I borrowed!!! And the bulk of that money was going to INTEREST!! And, like most good Americans, I spent some of that money to help boost the economy...

Just as it seemed like I was catching my breath again, having started another small business (a karaoke company) and going back to school, I hit that three year mark and my rate adjusted to 9.25%.  Ouch.  Over the next year, I was late every month, but somehow or another, I made every payment.  Then at the 4 year mark, it went up to 10%, and I found my self falling behind a month or two, but catching up.  Then, finally, in November of 2007, it went down to 9%, and I actually was relieved, because including insurance and taxes, at least I was below the $800 payment mark again.... $797 a month.  (After, of course, yet again arguing with them about how they recalculated my equity... but that's another story for another day).

Meanwhile, thanks to Colorado passing a smoking ban, the bars I did karaoke shows at ended up closing due to 40% or greater loss of business.  Yea, smoking bans are good for business, NOT!  I graduated college in May, but despite finally having a degree, there are few good jobs to find, especially for someone who, by this time, had been self-employed for 15 years.  I cannot tell you how many times I went on a job interview just to be told "we don't think you'd be happy having to work under someone else... we're uncomfortable hiring someone used to calling the shots... you're used to earning more money than we are paying..."  HOW AGGRAVATING!!  I'm like, WHY did you bother calling me in for an interview?  I actually did ask that a few times - always got the answer "well, you sounded interesting, and I wanted to meet you" or something along that lines!

Meanwhile... that "good" mortgage had become the proverbial stone around my neck, those credit cards I'd long since either closed or defaulted on, and my precious credit score that I was doing so much to raise, that is oh-so important in this day and age, was now at 570.  By March of 2008, I found myself with no more savings at all, no income at all, and no way to pay my mortgage.  This time, at least, I did something smart:  I called my mortgage company. I let them know what was happening - that the last of my clients had closed their doors, that my business of by then 4 years had failed, and that although I was getting interviews, I was having difficulty finding a job (much less coming up with a new business idea!)  Is there anything they could do to help me?

And - no joke - they said to me, "Well, I see you are current right now.  We can't do anything until you fall behind."

I swear that is the most illogical thing of our mortgage industry at all:  They won't work with you unless you are already behind!  I wanted them to work with me NOW, before my credit took yet another hit!  But NOoooo... at least the young man I spoke with at Amtrust (Ohio Savings Bank having changed their name a few years ago) did give me some good advice:  "Call us on April 2nd, because your next payment is due on April 1st.  That way, by calling us on the 2nd, you are then "behind" even though you have until the 15th to make the payment, and ask us to send you the Mortgage Assistance application.  Better yet, go to our website and download it now and fill it out, then call us on the 2nd, and fax it to us that same day.  Mortgage Assistance can take 30-60 days to process, by starting the process as soon as possible, you can improve your odds of us helping you and also, hopefully only fall one or two months behind, miminimizing damage to your credit."

Well, I did exactly that.  On April 2nd, since I still wasn't working, I got the Mortgage Assistance application, filled it out, sent it in, and waited.  Meanwhile, my grandfather died, and I received a small inheritance of about $1200, which I used to stop my electric from being turned off, got the water paid, and put some propane in the tank.  I also went ahead and made my April mortgage payment, on the 27th of April, which - oddly enough - turned out to be a mistake.  Why?  Because on April 30th, Loss Mitigation at Amtrust called me and told me they had to deny my request for mortgage assistance because I was NOT behind!!  I explained that even though I just got caught up, it was a one-time thing 'cause of my grandfather's death, but that I still needed assistance because I wasn't working and didn't know when I would be working!  She then told me to call back after the 1st of May, to get my request reconsidered, since by then, I'd be behind again.

Which I did, call them on May 2nd, asked that they reconsider my mortgage assistance request, and they did and within just two days, called me and told me they had to deny my request, that they could not help me because I was NOT WORKING.  They could only help me if I could show some sort of income.

Oh for God's Sake!  If I had some income, I wouldn't need help!!!  Give me a friggin' break!  To make an already way too long story short, I went back and forth with them, multiple phone calls, multiple letters, lots of information about how lousy the real estate mortgage is in my town (more than 10% of the homes here have foreclosed, and not a single home has sold in over 13 months) hoping to convince them that foreclosing on me would leave them with a white elephant, you name it.  Finally, when I thought that I better start planning on packing up what little I still owned before they foreclosed, (having resorted to numerous yard sales just to keep food on the table and the lights on), after they'd told me for the "last time" that there was nothing they could do, I got the surprise of my life:  Fed-Ex delivered a Loan Modification offer to my door.

You could have knocked me over with a feather.  I swear when I opened up that package, I thought it was foreclosure papers.  It wasn't.  Instead, it was an offer - even though I still hadn't gotten a job - to modify my loan.

In brief, Amtrust offered to lower my interest rate from the current 9% to 5.25% for three years, at year four, it would go to 7%, then after that, it would return to the existing terms.  In addition, my now three past-due payments would be added to the principle of my loan along with the unpaid escrow (yes, that means I'll be paying interest on unpaid interest), plus a one-time fee of around $3,900, and my loan term would be extended back out to 30 years from that date (June).  My next payment wouldn't be due until August 31st.  In other words, to make it simple, it was the equivalent of a quick-and-dirty refinance.  My principle balance after all of this would now be... drumroll... $82,300.  In other words, I was not only back at 30 years like the last nearly six years since I refinanced never happened, I was now owing MORE than I originally borrowed when I refinanced.

Ouch.

I accepted.

Even though I'm now owing more than I borrowed originally, even though four years from now, I may be facing ridiculous 9%-10% interest rates, for now, for the next three years, I only have to pay $548 a month, including taxes and insurance.  I never thought I would actually be grateful to end up much further in debt than I started out at.

And I am grateful to Amtrust for this loan modification.  It's reasonable, it's affordable, and I'll keep my house.  From what I've heard talking to others who've gotten their loans modified, it's actually a good offer.  And, of course, it's VERY profitable to Amtrust.  This modification will make them, I estimate, about $38,000 more in interest payments overall, assuming I make no extra principle payments, than they would have already made off of my original loan over the next 30 years.

Sigh... I should never have refinanced.

You see, even though I was looking at 13% interest back in 2002 when I refinanced, that would have only been for a year.  It would have gone down to about 11.75 the following year, and within another year or two, would have been back down to 10% - the lowest rate.

You see, despite that high interest, if I never refinanced, I would have PAID OFF that original mortgage in 2010, thanks to all the extra principle I did pay on it the first four years, plus I would have been able to pay extra even when times got tough.  Even when times did get tough, I probably wouldn't have needed to hit my savings so hard as I ended up doing.

I don't want to lose my house.  I've lived here almost 10 years, and I love my house.  I love the small town I live in, my neighbors are great, and I love my house.  Yeah, I know, I already said that.  I am, however, facing the fact that in a few years, hopefully the housing market will improve, and I may end up having to consider selling my house, or ... God Forbid ... refinancing.

Which is exactly what my lawyer friend said when I showed him the modification offer: "Well, I would suggest you take this offer and then, in three or four years, refinance."

I don't know how, but I managed not to scream at him!

Somehow or another, I feel accepting this loan modification will end up being a mistake.  It's not yet - but it will end up being one :)  Already, I've found out things I didn't know about modifying my loan.  Mind you, I DID have a lawyer look this over!  What I didn't know when I modified my loan - and this is NOT in the paperwork! - is that I would no longer be able to pay my mortgage online at the mortgage company's website.  Why?  Because I'm in a modification program.  It is their "policy" to block online payments on their websites for customers in modification.  Yes, I'm trying to get them to make an exception for me. That means I must make sure I mail the check early - since mail is now taking upwards of 7-10 days to get anywhere for some bizaare reason or another - or pay it electronically through my own bank's bill pay service, which of course, also takes 7-10 days because my bank, like many others, actually cuts a check and mails it!  Or I can pay by phone with the mortgage company, but that costs $15 each time... grrr...

Another thing that is NOT in the modification paperwork is this:  Much of my so-called "rights" regarding foreclosure are gone.  If I go beyond the 14th of any month in making my payment, I can be considered in default of the modification agreement and they can begin foreclosure immediately.  No waiting until you are 2 or 3 months behind.  This is NOT in the paperwork.  It's not even implied!  My lawyer had no clue about this!  I would not have known this at all, except on September 2nd, the mortgage company called me to find out where is my payment!  I'm like, um, it was due on the 1st, I get paid on the 5th, I've got a grace period until the 14th, but regardless, I'll be paying it on the 5th!  And THAT is when I was told that I was technically "in default" and the rest of the nonesense...

So yes, already, I made yet another mistake: I agreed to the modification without asking about all of the unknown, unwritten, non-communicated policies and procedures that apply to the modification that they didn't bother to tell me about and that I would have had no idea I needed to know and/or ask about since they didn't bother to include them in the written modification.  Grrrr... so if you modify your loan, be sure to ask what all the policies are about it, how it may or may not affect your rights, etc., even though they aren't included in the documentation.

But anyway, I'm working now... finally got a job back on July 1st.  Sure, it's only $9.00 an hour, but at least it's a job until I can work my way up, find another job, or start another business.  At least this new job lets me telecommute, so I don't have to waste a bunch of money on expensive gasoline.  I just made my September payment, and even managed to pay an extra $20 on principle.  By next month, I'll be caught up on all the utility bills I've been terminally behind on all year, and maybe, just maybe, come November or December, I'll be able to finally put a few dollars back into my now-empty savings account.

So here I sit, owning my own home for almost ten years now.  A house I bought for $72,000 originally, put $17,000 down on, that I have paid a bit over $66,400 in interest on over the last nearly ten years, that I now currently owe more than $82,000 on.

So that's my mortgage mess.  For better or worse.  Maybe this will help someone else out there save themselves from some grief.

I wish I put that equity right back onto the mortgage when I refinanced.

I wish I never refinanced.