Misleading Mortgage Rates Raise Questions, Worry Industry

The Washington Post tells the story of Bryan and Susan Andrews, who, along with their four children, were looking to cut monthly expenses, and got the sales pitch that seemed perfect:

A mortgage at 1.95 percent, fixed for five years.

But after the deal closed, in 2004, the couple realized to their horror that the $191,000 loan they got was actually an adjustable-rate mortgage.

The rate has since climbed all the way to 8.3 percent and, because of the way the mortgage is structured, the couple now owe more than they did when they signed for the home loan.

They went to court, saying they were deceived. A federal judge sided with them and is allowing a class-action suit involving up to 7,000 borrowers against Chevy Chase Bank, based in Bethesda, Md.

The bank has appealed and on Friday was granted a motion for an expedited appeal. The bank says the terms were clearly stated in the contract and that the family should take any grievance to the mortgage broker who sent the original sales flier and acted as an intermediary.

The case worries the home mortgage loan industry because of the potential for hefty losses if other borrowers are allowed to rescind mortgages they claim were misleading.

It also underscores the rising uncertainty surrounding the kinds of loans that have emerged in the past five years, said Glenn Costello, managing director of Fitch Ratings Residential Mortgage Backed Securities Group.

These loans include such variations as interest-only mortgage loans and what are known as option ARMs, which allow people the choice of paying less each month than the interest would be.

In many of these loans, the amount owed is deferred to keep monthly payments down. The downside is that, at some point, the mortgage payments can rise sharply - and the amount owed can rise, too.

Banking regulators have only recently begun offering new information to borrowers about these loans and warning the mortgage company to explain them more carefully. Meanwhile, the mortgage loans have proliferated.

“Some percentage of borrowers don’t understand the terms of these loans, and it is to be expected that there would be some issues emerging,” Costello said.

The Andrewses, who live in Cedarburg, Wis., and previously had a 5.75 percent fixed-rate mortgage, say they didn’t realize what they had done until they got their first payment coupon for the new loan in the mail.

They couldn’t engage in a mortgage refinance into a different loan without around $5,700 in prepayment penalties. They sued two years ago.

Last month, U.S. District Court Judge Lynn Adelman, a federal judge in Milwaukee, ruled that Chevy Chase had violated the 1968 Truth in Lending Act, which requires lenders to clearly explain loan terms to borrowers.

The disclosures to consumers showed a “lack of forthrightness” and “would both confuse and mislead an ordinary consumer about the cost of the home loans,” the judge wrote.

Adelman ruled that while the borrowers were ineligible for damages, they could to turn back or “rescind” their mortgages. Recision would permit borrowers to be released from the loans and be reimbursed for any interest paid to Chevy Chase as well as their closing costs.

In other words, the ruling may give some home loan borrowers a refund of everything they have paid to live in their houses for years.

At the core of the dispute are some words that appeared on the top right corner of a document the lender must provide under truth in lending laws. One line read: “WS Cashflow 5-year fixed,” and the line under it said “Note Interest Rate: 1.950%.”