Welcome back prepayment penalties

Very interesting story out of the Asbury Park Press this morning:

Prepayment of home loan can be costly

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.

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One Response to Welcome back prepayment penalties

  1. Flippers flop as housing market cools
    By Ryan Nakashima, Associated Press


    LAS VEGAS — In the rampant real estate speculation of the Las Vegas valley three years ago, people lined up outside Pulte Homes sales offices overnight as if they were waiting for the release of the latest video game console or hot new movie.
    Having seen his house in an upscale part of suburban Henderson, Nev. jump $200,000 in value in 18 months, Sam Schwartz felt he couldn’t miss any part of the boom.

    He spent the night in the parking lot with TV, snacks and drinks, along with about a hundred other people.

    Schwartz intended to buy a new home and then quickly sell it within the year — for a huge profit. Most people waiting were flippers just like him, he said.

    “We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of that investment equity,” Schwartz said.

    But when home prices unexpectedly took a backward step, many investors seeking to cash in quickly were left “upside-down,” or owing more on their mortgages than what their homes were worth.

    The result was a glut of homes in the marketplace, communities spotted with empty houses and for sale signs — and a foreclosure rate in Nevada that leads the nation as owners unable to sell became saddled with unbearable debt payments.

    Foreclosure filings across the United States rose 47% last month from a year ago to 149,150 — one for every 775 households, according to statistics from Realty Trac Inc., a foreclosure listing service. And for the third straight month, Nevada’s foreclosure rate led the nation when it rose 220% from a year earlier to 4,738 filings, or one in every 183 households.

    In Clark County, which encompasses Las Vegas, one of every 30 homes began the process toward foreclosure last year.

    The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.

    “Everybody was thinking, ‘Hey it’s not the end of the world, because the homes across town are selling for $720,000. We have almost $200,000 in equity in the house and it isn’t even built yet,'” Schwartz said.

    He and his wife put down $5,000 on a home that would end up costing $560,000 with upgrades.

    While the Schwartzes were able to cancel before closing on a property that suddenly was worth only $490,000 — and recoup their deposit on a legal technicality — others were less fortunate.

    MORE …

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