Use Of Wraparound Mortgage Scams By Predatory Real Estate Operators To Skim House Payments From Unsophisticated, Credit-Lacking Home Buyers Attract Attention From Texas Lawmakers
- Home mortgage scams in El Paso and Austin have prompted three senators to propose legislation to curb the abuse and protect homeowners.
Senators Judith Zaffirini (D-Laredo), Kirk Watson (D-Austin), and José Rodríguez (D-El Paso) today [March 10] filed several bills to address “wraparound” home mortgage scams, which leave homeowners at the mercy of a middleman who may or may not keep up with the mortgage payments.
In one particularly egregious case in El Paso, a wrap scammer absconded with nearly $2 million from 200 families before the Texas Department of Savings and Mortgage Lending was able to intervene.
“Unfortunately, El Paso has become a prime area for predatory wrap scammers, in particular those that target our military families who might need to sell their homes quickly, our unbanked immigrant population, and inexperienced first-time homebuyers who may struggle to obtain credit through a traditional bank,” Sen. Rodríguez said. “All of these people are simply striving for the American dream of home ownership, and providing a better life for their families.”
A wrap loan involves the sale of a house with a preexisting lien. The second loan “wraps” around the first, and the new owner typically pays a higher interest rate on the wrap loan. The wrap lender should then use the wrap loan payments to pay down the first mortgage so that by the time the wrap loan is paid, the first mortgage is also paid off.(1)
But in a typical case, an unscrupulous wrap lender fails to pay the first mortgage, triggering a foreclosure. Alternatively, the first mortgage may have a due-on-sale clause, which the first lender may activate when they learn about the wrap loan, meaning the first mortgage suddenly becomes due in full without any funds available to pay it.
Current law has failed to prevent these scams and make victims whole. For example, wrap lenders take advantage of de minimus exceptions to avoid agency regulation and a current disclosure requirement is often ignored because it lacks teeth.
“Predatory lenders have found a new tool to take advantage of those who are working hard to save and buy their own home,” Sen. Watson said. “It is clear our current laws are inadequate to prevent this abuse, which is why the Legislature needs to act.”
The bills were developed with assistance from the Texas Department of Savings and Mortgage Lending, legal aid attorneys, and banking groups.
Other wrap scams have affected about 40 homes in the Dove Springs area of Austin. The Texas Department of Savings and Mortgage Lending has been investigating these scams as well.
See also, Austin American Statesman: Texas bills target ‘wraparound’ mortgage lending practices.