Even smart borrowers misled

Lender IndyMac Bank of Pasadena has agreed to waive her $12,000 prepayment penalty, and an Encino mortgage broker has agreed to refund $5,000 so Fries can refinance into a loan with a more reasonable interest rate and terms.

“I felt I had really been taken,” Fries said. “I decided these people have got to come through with something, and they are.”

Her story is an example of how even smart borrowers can be misled by the complex terms and stacks of documents that come with any mortgage, especially if it has adjustable interest rates and other confusing provisions.

IndyMac and the broker, Yea Loans, point out that Fries signed documents describing the terms of the loan. But Santa Rosa mortgage broker Marty McCormick, who represented Fries in her battle with the lenders, says she should never have been put into that loan.

He hopes other borrowers in similar circumstances will also fight back.

“I want other brokers to take these cases and run with them,” he said. “I hope there will be more reasonableness since we won one case.”

Fries is a retired nurse who lives in Montgomery Village. She has good credit.

In March, Fries agreed to refinance her 30-year, fixed-rate loan, with its 6 percent interest rate, because she understood from a persistent Yea Loans telemarketer that the rate for her new loan would be 2 percent.

Fries said she wasn’t comfortable doing business with someone so far away. But she understood that her rate would be fixed for five years and there’d be no prepayment penalty, so she agreed.

A notary came from Vallejo one night at 9 p.m., she said, and she signed, although she said she felt rushed and confused.

Her monthly payment fell from $1,888 to $1,097 . . . for one month. The next month, it went to $2,538, when the adjustable interest rate soared to 8.7 percent, and Yea Loans quit returning her calls, she said.

Fries had agreed to one of the most controversial loans made in Sonoma County in recent years — the option ARM. The option ARM, made to people with good credit, usually has a very low teaser rate for a month or more and then resets much higher.

Fries kept making the $1,097 payment, because an option ARM lets borrowers choose — for awhile — whether to make a full payment of principal and interest, or an interest-only payment, or a smaller “minimum” payment.

But every month she fell $1,440 further in debt, because the minimum payment, which was what she could afford, didn’t even cover the interest she owed.

“It made me deathly ill. My blood pressure skyrocketed,” Fries said.

Describing herself as a stubborn German, Fries took action. She got a job at a group home for disabled adults, and when IndyMac and Yea Loans refused to negotiate, she went to McCormick & Co., a Santa Rosa mortgage broker, to get help with her loan.

McCormick discovered Fries had paid a $7,414 prepayment penalty to get out of her first mortgage, and more than $3,000 in fees to Yea Loans.

He also saw that IndyMac Bank paid Yea Loans $13,125, or 3.75 percent of the loan amount, for getting Fries to agree to a loan with a high interest rate and a three-year prepayment penalty. McCormick argues that this commission — called a yield spread premium — should not exceed 1.5 percent, or $5,250 in this case.

He thinks most borrowers have no idea their mortgage broker makes more money if the broker steers them into a loan with a higher rate and a longer prepayment penalty period.

McCormick pressured IndyMac and Yea Loans to unwind the deal.

Yitzy Pearson, the broker with Yea Loans, did not return three calls from The Press Democrat requesting comment. But he wrote McCormick last month, “Ms. Fries knew what kind of loan she signed for, she wanted the lower payments and understood that she was going to be placed with a variable interest rate, as she signed each disclosure stating so.”

IndyMac said Fries and Pearson chose the loan and IndyMac’s job was to make sure Fries qualified for it.

Last month(October), IndyMac agreed to waive its $12,352 prepayment penalty, so Fries could refinance back to a fixed-rate loan, and Yea Loans agreed to return $5,000.

“You just can’t take this laying down,” Fries said.