Clark Howard's Tips

Investors to hand you a mortgage reduction?

May 28, 2008

New figures show that option payment loans are defaulting at higher rates than sub-prime loans. Clark has often spoken out against these kinds of loans, where your balance actually rises over time. Option payment loans sometimes go under the name "Pick a Pay" or "Pick a Payment." Countrywide is in the midst of a criminal investigation for allegedly pushing through falsified applications for these loans.

Meanwhile, The Los Angeles Times recently reported a new wrinkle on the old practice of owner financing in the loan market. Clark has done owner financing several times over the years. That's where he's actually served as the bank for a borrower.

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During that time, he's received letters from investors wanting to buy his loans. They typically offer him an immediate payout at a discounted rate. So if he holds a $120K note, for example, the investors may offer him $100K upfront. Obviously, he's never taken them up on their offer.

Now here's the latest twist: Investors are pooling money, going to banks and buying "non-performing" loans for between 30-70 cents on the dollar. Then they go to the homeowner and offer to reduce the interest rate and the balance on the loan. People immediately suspect that they're being scammed, but this is actually a new business in the marketplace.

The next question that comes to mind: Why wouldn't the banks themselves just do this for the borrowers? Clark thinks they're too bureaucratic to make it work efficiently.

If you're behind on your loan, how would you know if you're facing a legitimate mortgage reduction offer from an investor who recently bought your note? This may sound crazy, but Clark actually suggests that you spend some money, hire a lawyer and have them vet the paperwork. Lower-income homebuyers may be able to get this legal advice for free.

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