Content area
Full text
The loan modification offer was hard to turn down, in more ways than one.
It was July 2008. IndyMac Bank was failing and Fannie Mae and Freddie Mac were in a death spiral. Ballooning monthly payments were still a big worry for homeowners who had taken out adjustable-rate mortgages a few years earlier. Lenders and regulators were worried about the risk of ARM defaults, too.
In that environment, Aurora Loan Services Inc., a unit of the not-yet-bankrupt Lehman Brothers, approached some of its ARM borrowers with what must have sounded to many of them like a sweet deal. The servicer offered to lock in their teaser rates for five years from the date they were scheduled to start adjusting. The borrower didn't even have to sign anything. All one had to do was make two consecutive payments at the current rate and the loan would automatically be modified.
But the offer letter did not spell out how one could opt out of the modification offer, apart from failing to make the two mortgage payments (which, of course, would mean defaulting and potentially losing the home). And one borrower now says he didn't receive the letter at the time, and learned his loan had been modified only after the fact.
Why would a borrower want to opt out? Someone who was...