A suit files in South Carolina alleges the borrower was not properly informed of how an option ARM actually works. The suit was filed Nov. 16 in U.S. District Court in Charleston and names as defendants World Savings Bank FSB of Oakland, Calif., and Golden West Financial Corp. and Wachovia Corp., both of Charlotte. Option AMRs were invented in the 1980’s for wealthy borrowers, but mortgage enthusiasts sold the products to anybody and everybody by 2005.
By paying only the minimum, the unpaid interest is added to the balance of the mortgage, a process called “negative amortization.” Once the balance reaches a set amount, usually 125 percent of the original principle, the loan automatically resets to a higher interest rate. Hefty pre-payment penalties often mean the loans are unfavorable for refinancing, trapping the borrower, the lawsuit states. Attorneys say aggressive sales tactics left most borrowers with no idea about how the loans worked.
In a prior experience with HFC, and HSBC company, regarding a different type of loan one borrower described how lenders make the loan paperwork look right by omitting some items at closing. “Contracts are probably valid and legal, but during closing the customer isn’t told everything. After closing the buyer is told that the loan cannot be repaid within the loan period at the stated payment amount” the customer said. “Option ARMs will be the same way. If it is explained after closing, using branch empoyees as witnesses to what was said, the customer can try to recind, but it usually won’t happen. It’s all in the emotional link and sales tactic.” said the borrower.
Unpaid interest added to the back end of the loan was the backbone of second mortgage loans from HSBC’s Beneficial Finance and HFC.