Strong-ARMed out of a Home

Feb. 2, 2007 — -- It was just what the mortgage doctor ordered, or so Renee Schwengel thought. What it turned into was a financial nightmare that could cost her family its home.

To free up a little cash every month, Schwengel and her husband were looking to lower the monthly mortgage payment on the four-bedroom, Aurora, Co., home they shared with their two children.

The couple had been in an interest-only loan paying a mortgage of $1,600 each month.

They heard about a loan with low interest rates on the radio and decided to check it out. She said they got a new loan through Altus Home Loans, but the company went out of business several months later.

And the Schwengels soon found out that their new mortgage, an Option ARM, was not what they thought they were getting.

"It sounded pretty good. It never was mentioned that it was an Option ARM," Schwengel explained. "All he said is that it would be like 1 percent the first year, 2 percent the second year, and the third year we would have to refinance 'cause the payment doubles."

An Option ARM is an adjustable rate mortgage that gives consumers a variety of payment options, with an adjustable interest rate. Option ARM loans are designed to give consumers a lower monthly payment, but the payments usually do not cover the interest. Interest that is not paid off is then added to the the principal of the loan.

Borrowers are offered options on how large a payment they will make -- they can choose interest-only payments or a minimum payment that is usually less than the interest-only payment.

With so many variables, Option ARMs can be risky for people who don't fully understand their possible escalators, particularly if they choose the lowest monthly payments. And, like the Schwengels, some borrowers believe their loan companies offered them Option ARMs without fully explaining the potential pitfalls.

By the time the Schwengels' first payment rolled around, Renee Schwengel said she knew it was the wrong financial remedy. Her mortgage payments were lowered by roughly $900, but now she is paying an even bigger price.

"Of course it's not 1, 2, 3 percent. It's 8.375 percent," says Schwengel. "Every time I make a $626.29 payment -- I usually go $700 -- my principal goes negative $796.42 every month," explained the 42-year-old.

Schwengel said there's no easy way out. She said she would have to pay more than $8,000 in penalties to get out of the loan.

"They're very dangerous," said John Marcell, president of Better Mortgage Brokers, Inc. "Unless the broker sits down and explains in depth what the pitfalls can be with an Option ARM, those people are going to find themselves in financial difficulties in a very short period of time."

Schwengel said she fears she may lose her home because of her Option ARM loan. She's not alone.

Lawyer Jeffrey Berns started running commercials about the loans on local radio stations around California on Jan. 8, looking for people who felt they were dishonestly directed into Option ARMs. He said he has received thousands of calls in response.

Now Berns's law firm, along with the firm Rose, Klein, and Marias, plan to file a class action lawsuit for clients who they believe were unfairly guided into Option ARM loans.

"The disclosures that are in these documents are deceptive," says Berns. "There's a recast provision in these loans that they fail to disclose," Berns added.