When Carol Wallace sold her Sun City Roseville home two years ago, she got an expensive reminder from her lender.
She owed $5,964. Why? She had paid off her adjustable-rate mortgage early.
The lender offered to waive it, Wallace said, if she'd buy another house with one of their loans. But here was the point: She had cancer and didn't intend to buy again. She had to pay up.
Two years later, still ill, Wallace still fumes.
"It's written in my paperwork when I die to remind my kids," she said. "It says if there's a class action lawsuit, to remember me, to get my $6,000."
On Monday, the Federal Reserve plans to issue new lending rules aimed at limiting the exotic loans that fueled the current housing mess. Among the Fed's likely proposals: a rule that lets future borrowers escape prepayment penalties for 60 days before their loans reset to new interest rates and higher payments.
Whether or not that idea comes to pass, it will be too late for thousands in the Sacramento region who got loans that came with financial penalties for paying them off early, usually in the first two or three years.
Prepayment penalties made exotic loans attractive to global investors because they guaranteed a return if borrowers opted out early. But they also restricted borrowers options when the conditions under which they were made – a rising housing market – went sour.
Since early 2006, Home Front has heard many stories of borrowers who tried to refinance into safer fixed-rate loans but couldn't afford the prepayment penalties that, in some cases, could be as much as $15,000.
When their penalty eventually lapsed, the borrowers were trapped. They couldn't refinance because they owned homes worth less than they owed.
Count Robert Winward of Sacramento among them. He bought a house in the Rosemont neighborhood in June 2005 with an adjustable-rate loan that quickly threatened to hike his payments.
"I could have refinanced a couple of times," he said. "But what stopped me from doing it was that it would have cost about $15,000."
When his penalty period ended, he was unable to sell and unable to refinance, he said.
Winward is one of the luckier borrowers. His lender recently froze his interest rate at its original level for five years.
Did he know he had a prepayment penalty in 2005?
"I didn't understand exactly what it meant," he said. "When we bought, we were very naive."
Wallace said she knew she had a prepayment penalty. "But I didn't think it would be a problem because I didn't think I would have to move," she said.
Wallace said her son and daughter-in-law also paid almost $15,000 in penalties when they refinanced out of their risky adjustable loan into a fixed-rate loan.
Wallace, a former rehabilitation counselor and geriatric care manager, believes prepayment penalties should be banned. Consumer groups like the Center for Responsible Lending agree, at least for subprime loans given to people with spotty credit histories.
So does a majority of the U.S. House of Representatives, said Paul Leonard, CRL's California director.
"This is not a wild out-there proposal," he said. "This is a proposal that most policymakers tackling this issue are adopting. It remains to be seen if the Fed goes in that direction or not."
What does the lending industry think? Fred Arnold, president of the California Association of Mortgage Brokers, said it still doesn't have a position.
"They're very good for the consumer when disclosed properly," said Arnold, president of American Family Funding near Santa Clarita. "But we realize the consumer hasn't had the best disclosure."
Landlord 101
With so many investors picking up bank-repossessed homes in the Sacramento region, cities have begun raising some questions about whether the phenomenon will affect their neighborhoods.
In response, the Rental Housing Association of the Sacramento Valley, a trade group for single-family home property managers, has scheduled a July 19 seminar for investors.
The aim is to give prospective landlords a proper view of what being a landlord means. The seminar will be at the Sacramento Hilton, 2220 Harvard St.
Details: (916) 920-1120, or www.rha.org.
IndyMac's local ties
Earlier this week the mortgage industry was consumed with the news that IndyMac Bancorp. of Pasadena would stop making home loans and lay off 3,800 employees.
But there was a story behind the story.
IndyMac's embattled Chairman and CEO Michael W. Perry has local origins. Perry, born and raised in Rancho Cordova, got his start in the mortgage business here in the region, said Jim Paterson, partner and mortgage broker at Gold River-based Mortgage Consultants Group.
Perry, he said, won early respect as chief financial officer for the now-defunct Commerce Security Bank, which once had offices in Sacramento and Grass Valley.
Eventually, the bank put Perry in charge of its mortgage division, where he supervised its residential lending operations.
Paterson said Perry built the bank's wholesale mortgage lending division into one of the biggest in Sacramento. In the mid-1990s, he caught the eye of Countrywide Financial's Angelo Mozilo. He recruited Perry to Southern California, where the two started IndyMac.
Paterson described Perry as an "intelligent guy, very well- respected in mortgage banking circles."
Call The Bee's Jim Wasserman, (916) 321-1102. Read his Home Front blog at www.sacbee.com/blogs.
