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Stories from the Dysfunctional Mortgage Market

I think today is the day for really horrible stories of market dysfunction amid ignorance or outright collusion by the authorities. This does not end with debt collectors on bad checks. It leads back to the mortgage market, where we’ve seen the most horror stories over the last several years. Most market analysts focus on macro issues like housing starts or prices to determine whether or not the market is “working.” This neglects the fact that, at a micro level, the market remains horribly broken.

I could probably write a story a day based on emails or forwarded stories that cross my path, and perhaps I will. For now, let’s just look at a couple examples of this market dysfunction. From a few days back, here’s Wells Fargo just rewriting the rules for their mortgage, for little other reason I can discern other than it suiting them at the time.

Janet Bandur and her husband, Darrell, discovered this after Wells Fargo contacted them recently to say that their home equity line of credit was being closed because “it is no longer compatible with today’s systems.”

The Bandurs were told they had one year to pay off the roughly $87,000 they had outstanding on the account.

“I don’t understand why they did this to us,” Janet Bandur, 66, told me. “We’ve had this line of credit for 24 years. And suddenly there’s a problem?”

The Woodland Hills couple pulled out their contract to see whether Wells Fargo could shut down their account willy-nilly. At first glance, it seemed not.

The contract said that if the account was closed, the Bandurs must pay any outstanding amount “within seven years,” not the one year Wells was insisting on.

Banks rely on a disequilibrium of contract knowledge. They surely know they cannot make anyone pay off a home equity loan in one year when they have seven years under the contract. They hope that the Bandurs won’t be able to figure that out. And that will give them the opportunity to collect the money faster, or even better for them, pile on fees as punishment for non-payment. And the bank buried a time bomb in the fine print, essentially reserving the right to “change any term or condition of this agreement… “without limitation.” This begs the question of why they have families sign a contract in the first place, considering that it doesn’t formally exist in any immutable form.

Gretchen Morgenson, another collector of these stories, brings us this one, which concerns a short sale on the Florida condo of Alexandra Garcia. In this case, Garcia finished the short sale with Bank of America. They waived the right to pursue a deficiency judgment for the balance between the sale price and the amount owed on the mortgage, with Garcia paying a nominal fee. And then:

On March 7, it rejected some of the terms noted in the closing documents and returned the money. The next day, it sent a letter approving the same terms. Worried that the deal might be scotched, Ms. Garcia revised the documents to the bank’s earlier specifications and paid an additional $575.

On March 16, Bank of America asked Ms. Garcia for the $575 that had already been sent. But, the bank employee wrote: “I did receive and approve your closing docs today.”

Three days later, Ms. Garcia’s lawyer again wired the sale amount to the bank. It rejected the wire and on March 20 sent Ms. Garcia a letter declining the short sale. The deal was off, even though the property had changed hands, the buyer had moved in and the new ownership had been recorded.

The letter said the sale had been denied after it was submitted to the investor, Fannie Mae. Fannie had said no “due to (insufficient offer, not willing to sign a deficiency agreement, or contributing to the loss),” the letter added, never clarifying whether one or all three of those factors were behind the denial.

Eventually, this case got worked out. But at one point, you had a circumstance where the borrower sold the home, the new owner moved in, and the bank still claimed that the sale didn’t exist. That simply shouldn’t happen, and it speaks to the incredible complexity in modern mortgage systems.

The previous case, with the Bandurs, ended with Wells Fargo moving part of the way toward them after the family filed a complaint with the Office of the Comptroller of the Currency. Wells would allow a payoff over seven years, but with a quicker amortization schedule than stipulated in the contract, forcing them to pay more per month. This is still getting litigated.

These stories scream “broken market.” The individuals navigating the mortgage space have almost no hope to make it successfully, given all these pitfalls. A strong consumer agency at CFPB may eventually alleviate this dysfunction; their hire of Adam Levitin, the Georgetown law professor who understands all of these scams, is very promising. But for the moment, it’s just a mess out there.

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David Dayen

David Dayen