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Last-minute closing costs plague mortgage borrowers

Tips to avoid closing disaster Mala Bawer applied for a mortgage from First Interstate Financial Corp. three years ago because the company promised her a loan no one else could deliver. Turns out, First Interstate couldn't deliver it, either.

After getting her business -- and signing a lock-in agreement with one set of terms -- the Shrewsbury, N.J., mortgage bank came back and changed the pricing and terms of Bawer's mortgage before closing, costing her more than $2,500. The company, which denied any wrongdoing, eventually agreed to pay the 48-year-old Somerset County, N.J., woman some of her money back after she sued.

Unfortunately for consumers, problems like Bawer's pop up all the time. Lenders, brokers and banks routinely change loan terms between the time of application and closing. Sometimes they have legitimate reasons for doing so, but often they don't.

Surprise, surprise, surprise
No matter what the cause, the result for consumers is higher-than-expected mortgage bills. People who don't closely monitor their lenders every step of the way and guard against trouble can easily end up stuck at the closing table with loans they can't afford or can't avoid.

"The consumer is at the mercy of the misrepresentation of the broker of what they can get you," Bawer says. "There's nothing that prevents them from writing a loan lock as they want it because all they do is stand behind and say we never guaranteed it.

"The consumer advocate part of me says this is a big consumer issue." For years, borrowers have swapped horror stories about last-minute problems popping up before and during mortgage closings.

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Sellers make unreasonable demands before they agree to sign anything. Buyers have to borrow money from co-workers because they forgot about charges and have already spent their last pennies on down payments. Realtors and lenders get too busy, lose paperwork or otherwise run into trouble, delaying closings by a few crucial hours or days.

But one of the most insidious and costly problems is also extremely common -- the changing of loan terms between application time and closing day. Lenders, banks and brokers "promise" to make loans on one set of terms, then change those terms before closing, pointing out their promises came with conditions.

Sometimes, customer errors or misrepresentations -- such as someone saying his $100,000 house is worth $150,000 -- cause the problem.

Lender goofs and grifts
But all too often, lender screw-ups, outright lying and arcane lending practices are at fault, according to borrowers and consumer advocates. Overzealous or undereducated brokers and loan originators promise loans they either can't or won't deliver.

And because efforts to reform the mortgage process in a way that would prevent last-minute problems have failed, loan shoppers keep getting ripped off every day.

"You've identified a very big problem with the whole mortgage application situation," says Margot Saunders, managing attorney at the National Consumer Law Center, a Boston-based consumer advocacy group. "There ain't a lot that people can do either and it's unfortunate."

When customers apply for loans, for instance, they provide credit, income, employment and property information to their lenders.

Those lenders perform a preliminary credit review, but usually don't thoroughly check the other information borrowers provide. They then issue so-called "conditional approvals," which say something along the lines of "We'll loan you 'X' dollars at 'Y' rate and points." Some even let customers "lock in" those terms by signing rate lock agreements.

The problem is, some customers forget about the word "conditional." Lenders make it tougher on them by overstating the scope of what they're offering. They throw out terms such as "pre-approved" or "approved, provided these conditions are met" and gloss over the fine print, which typically says the lenders can rescind or modify their offers for a myriad of reasons.

When borrowers later object to changes in terms, lenders just point to those disclosures and say "Tough luck."

Mala's story
That's what Bawer, who paid $2,580 more in fees than she expected for her mortgage, alleges happened to her.

The saga began back in the spring of 1999. Bawer wanted to refinance her first mortgage for $500,000 while leaving her current second mortgage of $115,000 alone.

She needed what's known in the industry as a jumbo no-documentation loan. By their very nature, such loans are riskier than conventional mortgages. They exceed certain balance limits set annually by Fannie Mae and Freddie Mac and don't require borrowers to submit written proof of things like income or assets.

Because of that, they come with additional restrictions that don't apply to regular loans. Most lenders Bawer contacted wouldn't make jumbo no-doc mortgages to borrowers who would end up with a combined loan-to-value (LTV) ratio (between their first and second mortgages) of more than 70 percent after closing. But she says First Interstate was willing to go all the way to 75 percent. As a result, the firm got her business.

While First Interstate is a mortgage bank, it acts as a mortgage broker from time to time. In those cases, it doesn't actually make loans. It takes loan applications from borrowers, gathers various documents and forwards them along to wholesale lenders. That was the case with Bawer's loan.

A signed lock-in agreement dated June 7, 1999, and provided by Bawer spells out terms for a 5/1 adjustable rate mortgage. It lists a loan amount of $500,000 at an interest rate of 6.875 percent and 0.50 points, or one-half of a percentage point of the loan amount, in fees.

A June 11 letter written by First Interstate Vice President Andy Savoca makes reference to the LTV ratio she wanted, with one sentence reading "The refinance had restrictions of a 75 percent maximum loan to value between the two mortgages."

That letter goes on to say First Interstate wouldn't have a problem making a loan of the size she wanted as long as the house appraised for more than $800,000. A June 17 appraisal valued the property at $842,000.

But a month later, Savoca wrote back to say that the lender to which the company brokered the loan, Washington Mutual, wouldn't allow a total LTV ratio of more than 70 percent. That meant she could only get $474,000 at the price offered to her.

The July 14 letter goes on to say that Savoca negotiated with them to make an exception. But the loan would have to be for $516,000, rather than $500,000, and would come with a full point, rather than a half-point, in fees.

That meant Bawer would have to pay $5,160 to get the loan instead of the $2,500 "promised" in the rate lock agreement. After fighting over the change in terms and getting nowhere, Bawer says she had no other choice but to go ahead and close the loan.

"By that point in time, interest rates had gone up and I really couldn't do business with anyone else."

Bawer maintains that First Interstate pulled a bait-and-switch on her. She says her research showed that 70 percent was a common cap in the industry for her kind of loan. In her opinion, the company should have known that and that it purposefully offered a loan it knew it wouldn't be able to place with a wholesale lender just to snare her as a customer.

"On the basis of this misrepresentation, they locked us in," she says.

She fought with First Interstate in an attempt to get the extra half-point refunded, even though it was a miniscule amount of money in relation to the overall loan. But complaints to First Interstate and Washington Mutual weren't productive, with both maintaining the loan was handled correctly.

The New Jersey Department of Banking and Insurance, with which she also filed a formal complaint, said the problem was a contractual dispute and it couldn't do anything as long as the contract didn't violate any laws.

Then in March 2000, she filed a lawsuit in Monmouth County Superior Court. After wrangling over the case for more than a year, First Interstate and Bawer agreed to settle. The company offered $1,000 and Bawer accepted, saying she was worried about getting stuck paying First Interstate's legal fees.

"I got scared about things being so tipped against me at that point," she says, adding: "I'm well-educated. If it can happen to me, it could happen to anyone."

Savoca says he didn't do anything wrong. He points out that everything provided by the borrower at application time has to be verified and that lenders have a wide variety of programs, pricing and guidelines. Depending on what underwriters find when they investigate the information provided up front, they can refuse to make loans or charge more for them.

He says that's what happened to Bawer because she wanted to get a no-doc loan, leave her second mortgage on the books and take cash out of her home through the transaction. He adds that she could have taken the $474,000 loan Washington Mutual offered her and gotten the same rate and points promised to her originally.

Keep on your toes
"What you apply for is never guaranteed," Savoca says. "Any loan, no matter what you apply for, is not guaranteed. I don't care if you're Donald Trump, it's all about the findings of the loan as the process goes on.

"There are variables during the process that may change the initial assumed profile of the loan. That's it."

Some of those variables are commonsensical. A borrower who says his home is worth twice what it really is shouldn't be surprised if the lender comes back after ordering an appraisal and says, "Hey, we can't make this loan."

But other things that can change the price of a loan are arcane, bordering on bizarre.

Borrowers who aren't familiar with the intricacies and minutiae of the lending business could proceed happily toward their closings, only to find that all of a sudden they're going to have to come up with a few thousand more dollars or lose their houses and loans.

Take David Stresser, a 38-year-old scientist who bought a Charlestown, Mass., condo in 2001. He applied for a 30-year, $316,000 mortgage online at LoansDirect.com, a division of E*TRADE Group Inc.

Up front, he was told the loan would come with a one-point fee. But about a week and a half before closing, the lender called and said that because the condo he wanted to buy was in a three-unit building, his loan fell into a special risk category. That meant he'd have to pay five-eighths of a point extra, or $1,975, to get the same rate.

"They told me, 'Oh, you've got a three-unit condo here. Well, that changes things. We're going to have to adjust the points you're going to have to pay to get the same rate,'" Stresser says.

While he says he was satisfied with the lender's service overall, it certainly came as a surprise to find out he had to come up with almost $2,000 more to close in just a few days.

E*TRADE spokeswoman Deborah Newman said the company notified Stresser about the problem as soon as it received an appraisal back showing that his property wasn't a typical, conforming condo. He had accidentally identified it as such during the application process.

E*TRADE offered to return what is normally a non-refundable lock fee and said it would have returned any charges that were a result of a mistake on its part. But the bank wouldn't waive the charge for Stresser -- even though the company doesn't believe he was trying to pull a fast one -- because it wasn't at fault.

"It's our job to provide our customers a good value and provide them with something that's competitive. If it had been our error, we would have aboslutely made good on it," Newman says. "We don't even say for one minute that he was attempting to mislead us and we were not attempting to mislead him in any way. But it's just that the mortgage can't close until we receive the appraisal and it came in and it indicated it was a different property than the application said it was and we had to adjust."

Lenders don't need a legitimate reason to change the terms, though. In the most egregious cases, brokers and lenders will just throw some extra costs into a loan to pad their profits, according to consumer advocates.

And while lenders point out that people like Stresser are free to walk away and find new mortgage providers if they don't like the terms presented to them, the NCLC's Saunders says that isn't practical in many cases. Market rates may have risen enough, for instance, that refinancers would have to pay higher rates if they started over at new lenders. And home shoppers can lose the properties they're trying to buy.

"It's a real problem. You can't walk if you're absolutely depending on getting that loan that week," she says.

Stresser, for one, was afraid he'd lose the condo he wanted if he didn't just pay the extra fee.

"By then, I was so far in, I'm not going to kill the deal and find a different lender," he says. "We just shelled out all this money and it's funny because you sort of lose track -- what's another thousand bucks? You just don't care. I could have walked away, but my fiancée and I, we liked the property, it's a competitive market and we had already been scooped on another property."

The good with the bad
"Some lenders are out to make money, you know, and they'll do anything they can to make it," says Willie Smith, a 46-year-old machinist from High Point, N.C.

He still remembers going back and forth with his lender eight years ago about a $75 "junk" fee the company wanted to charge. In early negotiations, it agreed to waive the charge. But come closing time, late on a Friday afternoon, there it was buried in the closing documents.

"Everybody's looking to get that key to that door," he says. "They could put that fee there and most people would never see it. They could sign the papers and not even know it was there.

"Just like any business, you're going to find good people and you're going to find people who can make a dollar any way they can."

-- Updated: Nov. 13, 2002
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