About 800 lawyers who volunteered to help lessen Maryland foreclosures are only now discovering large numbers of subprime borrowers who were enticed with initially cheap but extremely risky mortgage schemes. They are now concluding that one of these risky mortgage options, called payment option arm (POA), caused thousands of houses in the state to become repo homes.
POA loans were used by lenders like the bankrupt IndyMac and World Savings to entice more customers to take out mortgage loans even if the lenders knew these borrowers would not be able to pay the loans once the teaser payment periods were over. Many of these borrowers, whose houses are now repos houses, were made to believe the equity they will build up during the teaser payment periods will be enough to ensure affordable monthly payments during the longer part of the payment period.
POA loans are considered by many analysts the most toxic mortgage loan ever created because it requires only a small amount of money from borrowers during the first months. Borrowers were given three options for initial monthly payments: a small percentage of the monthly interest, interest-only payment and the option of paying the properly computed monthly amortization.
The last option however was not recommended by lenders wanting to reach sales quotas and commissions, thereby increasing the number of unqualified borrowers whose houses later became repo homes.
The federal government and many states, recognizing the deadliness of POA loans, have passed regulations to make POA illegal. But thousands of borrowers who knowingly or unknowingly got POA mortgages are now struggling to keep their properties from becoming repo homes.
The case of a retired government employee illustrates the harmfulness of POA loans. When she took out her loan, her lender promised that her monthly payments for the first five years would be low and that her total payments for five years would be enough to keep her monthly payments low after the teaser period.
Now as she is struggling with her monthly payments and news of thousands of repo homes, she wants to apply for loan refinancing, but she is not qualified because the value of her house has become $70,000 below her mortgage loan amount.
Members of the Maryland lawyer group, called Civil Justice Inc., have also found out that they are facing another problem besides the POA loan and large numbers of repo homes—the repackaging of mortgage loans into mortgage-backed security packages which were sold and resold to various investors.
John Cutts has been educated in the finer points of the foreclosure market over 5 years.
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