As an owner of a property-title search business for 23 years, William Soodul figured he knew a thing or two about real estate transactions.
So it came as a shock to Soodul, of Allentown, when he discovered his $233,000 mortgage had a little-known “gotcha” clause in it.
If he refinanced the loan within three years of its inception, he would have to pay a $10,000 prepayment penalty to the lender that provided him with the money in the first place.
Soodul said he never dreamed he would face such a fee. State law has barred prepayment penalties for nearly 40 years.
But Soodul, whose business is to ensure property records for new buyers are clear of any liens, wasn’t aware that, in many cases, state law no longer can stop prepayment penalties.
“Why didn’t I know better?” said Soodul, who is considering selling his one-story, A-frame house, which features a full-wall fireplace and hardwood floors. “That’s what I ask myself as I lay awake.”
With a subprime loan crisis now roiling the multibillion-dollar housing and lending markets, homeowners like Soodul who took loans in recent years, especially adjustable-rate loans, may find unpleasant surprises in their mortgage papers.
Lenders who offer the low-rate loans do not want borrowers to pay them off early and leave them with little to no profit from interest.
Borrowers also are finding state consumer protection laws have fewer teeth today because federal banking regulations in recent years have superseded state consumer protection laws — even laws against costly predatory lending practices.
And a U.S. Supreme Court decision nearly two weeks ago gave further leeway to nationally licensed banks to bypass state consumer laws.
New Jersey regulators, who enforce the ban on prepayment penalties, have even weakened consumer protections themselves. They have let state-licensed banks and savings and loans levy prepayment penalties in order to help them compete for business.
Consumer advocates say those decisions have made the subprime loan crisis worse and could force many homeowners into foreclosure. Consumers with subprime loans — called such because the interest rate is typically higher than standard prime loans — usually have a hard time refinancing into more traditional loans because of their poor credit histories.
Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, Newark, said the group’s housing counselors have talked to hundreds of homeowners in the last year who faced possible foreclosures because they cannot meet their monthly payments. And even if they do refinance, they are hit with prepayment penalties costing thousands of dollars.
“People pay the penalty, because in the long run it’ll be more expensive” to keep the subprime loan, Salowe-Kaye said. “This is one factor that makes it more difficult to put people into a better mortgage when they do run into trouble.”
Salowe-Kaye said she believes the penalties have caught consumers unaware because New Jersey had a long-standing prohibition against prepayment penalties.
“The average person has little or no knowledge as to what’s in the mortgage documents,” Salowe-Kaye said. “They don’t find out until they have a problem.”
A Bear Stearns report estimated that about 15 percent of prime loans and some 75 percent of subprime fixed- and adjustable-rate loans given nationally in 2005 contain prepayment penalties.
Early payment penalties are more typically included on adjustable-rate loans that offer low “teaser” rates that then adjust higher later on.
“It’s a way the deal is packaged, and it gives consumers a little more choice” in the types of loans available, said James Meredith, executive vice president for New Jersey League of Community Bankers, a trade group for many state-based lenders.
State and federal regulators say written disclosure of loan terms should always be provided to consumers.
If a consumer feels overwhelmed by the process, he or she should hire a lawyer.
The state has investigated 576 prepayment complaints since 2003. The state cannot say how many were resolve in the borrower’s favor.
State banking director Terry K. McEwen said that the state has a hard time forcing state banks and savings and loans to abide by the consumer protection laws for fear they will simply convert to federal charters, which would mean they would not have to follow state consumer laws.
“You want to make sure consumers are protected,” McEwen said. “But we have to have a mechanism that creates a level playing field so we can have state-chartered institutions.”
Michigan fought to apply its state rules to the mortgage subsidiary of Wachovia Bank, a national bank. Wachovia balked, and the case went to the U.S. Supreme Court.
New Jersey and most other states backed Michigan in an attempt to enforce the state laws, but the Supreme Court sided with the national banks and federal regulators in its 5-3 decision April 17.
Assemblyman Neil M. Cohen, the chairman of the Assembly’s banking committee, said he was outraged by the high court’s decision.
“It’s a nightmare ruling,” said Cohen, D-Union. “We’re analyzing the decision to see if there’s wiggle room to see if there are other statutes we can use to get around it.”
For Soodul, the wording in his December 2005 mortgage states he would not have to pay a prepayment penalty. But an addendum to the note discussed a “prepayment penalty.”
The addendum stated he would have to pay six months worth of interest if he paid off more than 20 percent of the loan within the first three years.
Soodul said he does not recall seeing that clause. “You can’t read all that stuff,” he said. His initials do appear on every page of his mortgage and the additional riders.
Soodul obtained an adjustable-rate deferred interest loan from Countrywide Bank, which offered a low payment plan at first but added to his overall debt through the first three years. The loan adjusts monthly and is at about 8.5 percent interest now, above the standard fixed loan rate of about 6 percent.
Last year, as the loan adjusted, the monthly payments began to increase, which he knew could happen. He then calculated that the loan would add $10,000 to his mortgage debt each year for three years.
His monthly payment would eventually double in that time, from less than $1,500 to $3,000 a month.
Soodul figured he would just refinance with another lender. But at the closing, the bank asked for $10,000 to cover Countrywide’s prepayment penalty.
“I said, “It’s New Jersey. How can there be a prepayment penalty?’ ” Soodul recounted.
Soodul said he did not have the money to close on the new loan. He said the loan salesman never told him about the prepayment penalty.
Countrywide did not respond to requests for comment. Soodul has filed a complaint with the state. Countrywide responded to the complaint by saying Soodul was given full disclosure on the terms of the loan.
Soodul has recently sold an automobile and several antiques to pay down debt and is considering selling his house this spring.
“I had never dealt with a mortgage company (for personal finances).” If you do, Soodul said, “you can’t get away from them.”
Source: www.app.com
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