Mortgages

Fed Tells Homeowners: Pay First, Then Let’s Talk

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RescissionFor people trying to save their homes from foreclosure, it’s a little-used Hail Mary.

And if the Federal Reserve gets its way, it won’t exist much longer.

The Hail Mary is called rescission, and it allows borrowers to cancel (or rescind) a mortgage if they can prove it was made illegally.

In most rescission cases, the homeowner claims that the lender lied about the loan’s terms, or covered up important features like balloon payments or interest rates that climb over time.

At its simplest, the process works like this: The borrower sends a letter to the creditor saying that the loan is invalid because it was written in a fraudulent manner. If it is proven, usually in court, that fraud did indeed happen, the creditor releases the lender from the mortgage. After that, the borrower gets a new loan from someone else, and uses it to pay off the original lender.

The lender gets its money back. And the borrower escapes a mortgage that contains lots of fraudulent fees and charges she didn’t know about.

The Fed wants to flip the order of things. Under the agency’s proposed rule change, the borrower would have to repay the loan first, and then haggle over whether or not the loan involved fraudulent practices worthy of a rescission.

In a statement, the Fed says it proposed the change as part of a package of “enhanced consumer protections and disclosures for home mortgage transactions.”

Homeowners’ advocates say the rescission rule change does the exact opposite.

“This proposal would make it completely useless to all but the wealthiest homeowners” who presumably could pay off the entire loan without getting a new loan, according to a letter sent to the FTC by nearly 200 nonprofit groups and attorneys who handle rescission cases on behalf of low- and moderate-income homeowners.

The Mortgage Bankers Association did not return calls on the issue. The Fed declined to comment on the letter.

“We are still in the public comment period for this proposal so I’m unable to respond,” said Susan Stawick, a Fed spokeswoman.

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