Very interesting story out of the Asbury Park Press this morning:
As most of your know, loan pre-payment penalties are not allowed in New Jersey. These penalties, as the name implies, require that borrowers pay the lender an additional fee for paying the mortgage off earlier than previously agreed. They don’t necessarily go for the life of the loan, but typically only for the first few years. Unfortunately, things are changing that might seriously change the NJ mortgage industry.
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.
Prepayment penalties were created to protect the lender from the losses associated with an early loan payoff. Unfortunately, in a down market, it makes it even harder for homeowners to refinance their loans.
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 problem is already beginning to catch borrowers off guard. With prepayment penalties that can reach tens of thousands of dollars, borrowers are finding it almost impossible to refinance out of their ever adjusting ARMS.
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.