DEAR BENNY: I fell behind on my mortgage last fall due to the replacement of an HVAC system. I thought I missed two payments. I called my lender and asked for some help. (The lender) told me that I did not qualify. I made two full payments, but my last payment was returned.
Approximately one week later I received a notice from a law firm that I was in foreclosure with a sale date coming up in less than one month.
Although I have asked, I have never received a statement from my lender detailing my payment history. I sent a note to the law firm disputing the debt and requested a copy of the original loan documents, along with the amount past due. Does the lender have to produce the original document prior to a foreclosure sale? The foreclosing attorney seemed to feel that this was a non-issue. –Preston
DEAR PRESTON: You have raised several issues. First, you disputed the debt. Under the Fair Debt Collection Practices Act (FDCPA), if a consumer gets a letter from a debt collector (which includes lawyers), that letter must state:
"This letter is an attempt to collect a debt. Any information obtained will be used for that purpose. Federal law gives you 30 days after you receive this letter to dispute the validity of the debt or any part of the debt. If you do not dispute the validity of the debt, or any portion thereof, the debt will be assumed to be valid by this office.
"If you do dispute it — by notifying me in writing within the 30-day period — we will, as required by law, obtain and mail to you verification of the debt."
So, in your case, if this was the first letter you received about the default, it would appear that the lawyer violated the law. You may still be in default on your loan, but it may help you to at least postpone the foreclosure sale. You should write the lawyer, advising him or her that there is a violation of FDCPA, and that you insist on getting verification of the debt.
If that does not work, you should immediately get an attorney to assist you. You may have to file suit not only to enjoin the foreclosure sale, but to add a complaint against the attorney. The law provides monetary relief for violations of the act, as well as attorney fees should you succeed.
Next, you asked whether the lender must have the original loan documents — especially the promissory note that you signed when you first obtained the mortgage loan. This is a hotly debated legal issue all over the United States. In the past, mortgage lenders would bundle a number of loans and sell them to such organizations as Fannie Mae and Freddie Mac.
It is called "securitization." In many instances, no one really knows where the original notes are; they may be buried in some New York City vault, or for that matter anywhere in the world where an investor purchased the bundle.
Although securitization was one of the factors that caused the mortgage meltdown a couple of years, I won’t discuss this in my column. However, many judges throughout the country have taken the position: "No note, no foreclosure"
This is not universal, since some judges have not agreed with that position. Perhaps some day, the U.S. Supreme Court will tackle that issue. But in the meantime, get a lawyer in your state to review your state law (including any cases in this area). If there are cases in your state that will assist you, by all means use this as a defense to the foreclosure action.
DEAR BENNY: I am fed up with paying taxes to our greedy and burdensome governments. If I can find somebody I trust and we both don’t have liens, can I sell my property for a minuscule amount and the second party sell his to me for a minuscule amount to reduce property taxes? In a year or less, we could sell back to each other. Is this legal? –Willard
DEAR WILLARD: I understand and feel your pain about having to pay taxes. However, if you go this route, you and your trusted friend may end up with a smaller place in which to live — namely, a prison cell.
No, it is not at all legal. You are defrauding the government, and both parties to such a scheme could face prosecution.
My understanding of most state recorders of deeds is that they will impose a recordation/transfer tax on the assessed value of the property, and not necessarily on the actual sales price. In your case, unless you can explain why you are selling your house for such a low (minuscule) price, you both will still have to pay the full transfer and recordation tax in order to swap properties.
Next, regarding the property tax, once again, my understanding is that taxing authorities use their assessed value — and not necessarily the purchase price. So I am not at all sure you would be gaining anything by using this process.
And, more important, if you both were to re-exchange properties within a short period of time (say one or two years), I suspect that you will get caught. With every jurisdiction now using computerized programs, it is a lot easier for the government to find out what you both have done.
Equally important: You will have to file your annual federal income tax showing your new address. The IRS will want to know about the sale, and that will also trigger a possible investigation.
It is a creative idea, but I cannot recommend it.
DEAR BENNY: In a recent article, a reader wanted to know whether it is better to make extra monthly mortgage payments or pay a larger sum at the end of the year. I suggest monthly payments. However, you failed to advise the reader to check to make sure there is no prepayment penalty in the contract.
If there isn’t a prepayment penalty, I would suggest they ask for an amortization schedule and verify the balance of their loans before making extra payments. This way they can follow along on their amortization schedule to make sure that they and the bank continue to have the same balance during the existence of the loan.
This is how they should go about making payments. Once they have their amortization schedule, verified the balance with the bank and made sure there is no prepayment penalty, they should make their regular payment monthly and then pay the principal payment of the next month’s scheduled payment and show "PP" for prepayment beside that payment on their schedule.
At the beginning of the loan the principal payment is very small and you can usually pay off several months to years of your loan in just one payment. This way you avoid all that large interest amounts each month.
I did this on each of my mortgages when buying my current house. Each time I refinanced my mortgage, I requested an amortization schedule and a non-prepayment penalty clause to shorten my repayment time. I was able to wipe away two to three years of payments with just an extra $100-$120 for the first prepayment alone.
So making a prepayment monthly saves you more in the long run than making one single payment at the end of the year and also eliminates more years of payment.
I hope this helps, but I would like to remind the persons who do this to make sure that they keep track of their prepayments on their amortization schedule as well as making a note on their checks that they send to their banks. –Connie
DEAR CONNIE: You make several good suggestions. First, when prepayment penalties are involved, it’s true that a lender will charge you extra moneys if you want to pay off the loan before its maturity date, or will not let you pay it off at all before it comes due.
However, from my experience, any prepayment penalty deals with paying off the loan in full — and not just making extra payments every year. You are correct, however, that home borrowers should confirm whether there is any such penalty. The promissory note that you sign is where you will find that information.
Second, whether or not you decide to make extra monthly payments, it is a good idea to get an amortization schedule from your lender. You can also get that online, just by typing "amortization tables" into your favorite search engine.
When you get the IRS Form 1098 from your lender each year showing how much you paid for mortgage interest and real estate taxes, make sure it is completely accurate. If the lender makes a mistake and the numbers are too low, you could lose valuable tax deductions.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.
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