» Se­nate bills seek to rein in preda­tory mort­gage lenders,

Wat­son, two col­leagues seek to rein in lenders, put a stop to scams.

Austin American-Statesman - - FRONT PAGE - By Bob Sech­ler bsech­ler@states­man.com Wraps

The small, often hand­writ­ten 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 aid 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.

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