Cannot Pay Back a Loan - Is It My Fault?

Added August 20, 2004 by Ilyce R. Glink

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Summary: A lender gives you money based on your ability to repay the mortgage. If you lose your job or even if someone lied on the appraisal or application doesn't excuse the fact that you borrowed the money and spent it. Now the lender who owns the rights to your mortgage has the right to be paid back, no matter how many "pennies on the dollar" he paid for the servicing rights to the loan. Who is to blame when a loan doesn't get paid?

Q: I have a second mortgage on my condo that I took out in May, 2000. Unbeknownst to me at the time, the mortgage agent lied on my application about the value of my condo. My condo was appraised at $70,000, but after I signed the application, he changed the appraised value to $125,000.

In August 2002, I was laid off and had no money coming in. My first and second mortgages went into default. The first mortgage lender started foreclosure on the property. The second mortgage company told me they investigated my property and discovered the $125,000 appraised value was grossly overstated.

Right now, my condo is only worth $55,000. This appraised value was approximately what was owed to the first mortgage lender. So, the second mortgage lender realized that there was no equity in my condo for me to tap and charged off my loan as a loss.

I haven't made a payment on the second mortgage loan in two years, but have been able to stop foreclosure on the first mortgage and bring those loan payments current.

Recently, I received a letter from the second mortgage company stating that my second mortgage loan has been sold to another company and the other mortgage company will now be servicing my loan.

Can this new mortgage company put my property into foreclosure if I don't pay them? The new mortgage company has stated in a letter to me that they have purchased my loan from the original second mortgage company and are holding me to the original terms.

The second mortgage loan that I received was for $105,000. However, that was given to me by a mortgage agent who lied about the true value of my condo. There is no way I will pay this new company $105,000 because the condo is not worth that amount.

What should I do about the second mortgage?

A: I think you're missing the point. Whether the lender changed the appraisal is irrelevant now. You applied to borrow that money. You then must have received a check for those funds. You then spent that cash. What happened to the money?

The lender supposedly gave you the cash based on your ability to repay the mortgage. The fact that you lost your job or even that someone lied on the appraisal or application fee doesn't excuse the fact that you borrowed the money and spent it. Now the lender who owns the rights to your mortgage has the right to be paid back, no matter how many "pennies on the dollar" he paid for the servicing rights to the loan.

From what you've told me, it would appear you owe this money fair and square. Unless you figure out how to pay it back, with interest, the house will be foreclosed upon, and it will further destroy your credit.

All of this will take years to come off your credit history, and that's if you bring the second mortgage current and start paying it on time. If you want to clean things up more quickly, you can file for bankruptcy, you may have the house sold off to settle the first loan, get the second mortgage debt off your books and start over. A bankruptcy will stay on your credit for 10 years, but you may be able to get a high-priced mortgage after 2 years and start over.

Although this won't make your financial problems go away, you should consider filing a complaint with the state agency that regulates banks and lenders and appraisers. Mortgage lenders are not allowed to change loan documents after you've signed them, and they may not be allowed to give out loans that are for more money than the property is worth.

Your lender acted like a predatory lender - and probably is one. You should call both the state agency that regulates mortgage lenders and your state attorney general's office and report the company so they can launch an investigation.

Published: Sep 6, 2004

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