The small, often hand-written signs are common sights at busy intersections in Austin and El Paso: “House for Sale. No credit needed. $10k down.”
But answering such advertisements is one way unsophisticated buyers come in contact with unscrupulous lenders who specialize in a practice known as “predatory wraparound mortgages,” according to legal aide attorneys and banking regulators.
Three lawmakers — state Sens. Kirk Watson, D-Austin, Judith Zaffirini, D-Laredo, and José Rodríguez, D-El Paso — recently proposed legislation to rein in the practice. Their bills would increase licensing and disclosure requirements for wrap lenders, and also beef up enforcement provisions.
So-called “wrap loans” are legal in Texas. When done legitimately, a home is sold with an existing lien still on it. The buyer uses a wrap lender to take out a second, higher-interest loan that “wraps” around the existing one. The idea is that the wrap lender uses the higher-interest payments from the second loan to pay off both over time.
But under wrap scams, a predatory lender purchases a home with a lien on it from an oftentimes desperate seller but, after reselling the home under a wrap loan, doesn’t use the higher payments to retire the previous debt.
For the new buyer, the result typically is foreclosure and loss of the home because payments on the first lien are never made, or because the first lien contains a “due on sale” clause that allows the original lender to demand immediate payment of the full principal if the house is sold. Meanwhile, the original seller can have his or her credit ruined for the same reasons.
“These are almost always unsophisticated, first-time home buyers,” said Veronica Carbajal, an attorney with Texas RioGrande Legal Aid in El Paso. “We would argue that the only thing they have done wrong is trust someone and open the door to fraud.”
In El Paso, the Texas Department of Savings and Mortgage Lending issued a cease-and-desist order last year after a wrap scammer made off with nearly $2 million from 200 families, officials said.
In Austin, the agency is investigating potential wrap scams involving about 40 homes in the Dove Springs area, and it also issued a cease-and-desist order in the case. The Austin American-Statesman wrote about the situation in Dove Springs in 2016 and 2015.
“It is a pretty egregious set of circumstances,” Watson said Monday. “These are predatory people taking advantage of people who are just trying to buy a home.”
Watson’s bill, SB 1995, would increase wrap loan disclosure requirements, add some enforcement provisions and also mandate that the disclosure be provided in a language other than English if the loan was primarily negotiated in another language.
The bill filed by Rodríguez, SB 1993, eliminates a loophole that currently allows wrap lenders and servicers to avoid licensing requirements from the Texas Department of Savings and Mortgage Lending.
Zaffirini’s bill, SB 1994, would render a wrap loan void unless it is made with the prior, written consent of all existing lienholders and is closed at a title company office. It also creates a fiduciary obligation and constructive trust for all payments a new owner makes to a wrap lender, ensuring the payments are used for their intended purpose.
Watson said he’s optimistic the bills will be approved, saying representatives of the banking and mortgage sectors he has spoken with have been supportive of them.
“It protects them in the long run,” he said. “They don’t want to have to foreclose on a house because someone didn’t know there was a lien on it.”
Susie Stringer, president of the Central Texas Association of Mortgage Professionals, said she hadn’t heard about the proposed legislation, but she also described predatory wraparound mortgages as “scams.”
“I would advise people to go through standard channels (when they buy a home) — a title company, an attorney,” Stringer said. “Have all the paperwork properly executed. There is no need to go through a middleman who has only his own interest at heart.”
In El Paso, Carbajal said, military families have been typical victims of the scams. They receive orders to ship out to a new base and opt to try to sell their homes quickly.
Similarly to unsophisticated buyers, she said, such sellers often come in contact with wrap scammers by responding to corner street signs. While all such signs might not be scams, she urged people to fully vet anyone with whom they’re considering entering into a real estate transaction.
“They see a sign on the street that says, ‘We Buy Houses,’ or ‘Fast Cash For Your House,’ and it seems very easy to sell their home,” Carbajal said.
“Our clients are working-class Texans,” she said. “It is a shame that people have taken advantage of their trust to rob them of tens of thousands of dollars.”