The Devil is in the Details

Written By Brian Hicks

Posted February 8, 2007

When it comes to mortgage finance, the devil is definitely in the details. And those hard-to-read disclosures that are sprinkled throughout your loan application spells them all out just like they are required to do.

But like any other legal document that requires a signature, they are only enlightening to the people that bother to read them and take the time to understand them.

And make no mistake about it, when it comes to contracts of any kind, especially one as important as a mortgage, it pays to comb through all of that fine print-even if you don’t feel like it.

That’s because as with any binding agreement, the onus is on each of the parties to understand exactly what they are signing. It’s a little something called personal responsibility.

But regardless of that, according to a story in the Washington Post, one set of borrowers has taken their lender to court, claiming that they were wrongly misled into signing up for a loan that they really didn’t understand. The lender in this case is Bethesda-based Chevy Chase Bank.

The couple, Brian and Susan Anderson of Wisconsin, claim that they were just trying to cut their costs when they were signed up for what they believed was a 1.95% fixed-rate mortgage two years ago.

It was only later, of course, that they realized the truth about their loan: it was an option ARM. The rate wasn’t fixed after all, only the payment was. The real rate was much higher-8.3%. And to their surprise, their loan balance grew and grew to the point where they now owe more than they did when they signed those documents.

To make matters even worse, the loan also carried with it a nasty prepayment penalty that would’ve cost them $5,700 if they had decided to refinance into a new loan.

Upset with their newfound predicament, the couple decided to sue.

And last month, a judge agreed with them. The bank’s disclosures to the Andersons, the judge, said showed a "lack of forthrightness" and "would both confuse and mislead an ordinary consumer about the loan." Chevy Chase, the judge ruled, had violated the 1968 Truth in Lending Act.

As a result, the judge said, the Anderson’s could be permitted to rescind their deal and receive reimbursement for the interest paid.

Chevy Chase, naturally has appealed the ruling and says that the broker in the deal is the one at fault.

Regardless of the outcome, this case only further underscores the need for due diligence on the part of borrowers everywhere. Laziness, after all, is no excuse.

On that point, defense lawyers representing the bank claim that the couple showed a

"consistent and stunning lack of interest in reading the documents they signed."

In fact, in a pretrial deposition, Susan Andrews explained that she trusted her broker and did not feel the need to "read every tiny word."

That, of course, was one big mistake. It was all there. They just didn’t bother to read it.

The jokers, fools and wolves strike again.

Mortgage Matters

Dear Steve,

Why is it that most brokers and lenders insist on pulling my credit and getting an appraisal of my house just to give me a mortgage rate? I tell them my credit score is 777, my house is worth $800,000, there is only a first mortgage of $500,000 and that I want to refinance with no additional cash. Shouldn’t this be enough to give me a rate quote?

Also, why is it that I answered an ad online to find out the rate available and sicne then over 50 brokers/lenders have contacted me? Was my information sold to every broker/lender out there? Why are numerous agents from the same company contacting me?



Dear M.R.,

Despite what most people seem to believe, getting a meaningful rate quote is not as easy as making a quick phone call or going online. A lender needs to know a whole host of variables before they can give you an accurate quote. Even then, the rate can change in an instant depending on market conditions. In fact, your quoted rate doesn’t even really exist unless your loan officer has locked it to allow for a timeframe that doesn’t expire before closing.

One of those variables, of course, is your credit score. Lenders pull credit at application because your rate to a large extent depends on it. And unfortunately, the truth is that most borrowers don’t accurately know their scores since they can change from month to month. Even then, most loan programs require three scores not one. It is your middle score that counts.

Also, the automated underwriting software that most lenders use cannot grant an approval without pulling the report. That’s because the software needs to be able to read all of the information contained in your credit report-not just the scores.

The appraisal can come later and shouldn’t keep you from getting an accurate quote as long as the information that you provide is close to the eventual evaluation.

As to your second question, they do sell you as a prospective lead to lenders once you’ve entered the site. These businesses aren’t loan based generally, but information based. Its how they turn a profit. Because of this they sell you to as many people as they can.

Numerous people from the same place end up calling you because these lists of prospects were bought at a price to be worked. Expect at least seven calls before they give up. Making loans after all is a profitable business.

Thanks for reading,



By the Way: The chief economist for Wachovia Corp., the nation’s fourth-largest bank, said recently that last month’s uptick in home sales doesn’t mean that the residential market’s troubles are over. ‘I don’t think so,’ Mark Vitner said. ‘There’s evidence the market still hasn’t hit bottom.’"

He attributed recent sales spikes to low mortgage rates and home-builder incentives. The market’s weakness, Vitner said, is reflected in order cancellations, which are still running as high as 50% in some areas, while the nationwide average has soared to 35%.

Also, a lender that we previously reported on before has fallen further still. On Monday, Mortgage Lenders Network USA Inc. filed for Chapter 11 bankruptcy protection, becoming one of the biggest casualties among lenders to people with poor credit histories as the U.S. housing market slows.

The Middletown, Connecticut-based company had been the 15th largest U.S. sub-prime lender.

The banking debacle continues.

Wishing you happiness, health, and wealth,

Steve Christ, Edtior


The housing bubble has popped, but the banking debacle has just begun. Email me your mortgage questions at

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