Lubbock, TX Nov. 17, 2010 — Two cash flow note buyers were accused of telling elderly property owners they would received up-front cash for their notes, but paid in trickles or forced them to accept lower amounts of money.
The Texas Attorney General has sued mortgage investors Enhance Mortgage Corp., Templeton Mortgage Co. and company officers Mark Templeton Brown and Amy Dawn Brown of Lubbock, accusing them of violating the state’s consumer protection laws.
According to court documents filed by the State, Enhance and Templeton primarily targeted former property owners who had previously self-financed the sale of their property to independent purchasers. Under such an arrangement, which is known as an owner-financed mortgage, seller-held mortgage, seller carryback, owner carryback and other terms, the seller agrees to receive mortgage payments from the buyer over time—rather than requiring the buyer to get a bank loan and pay the entire purchase price up front. The seller retains the right to receive monthly mortgage payments from the buyer.
According to state investigators, the defendants contacted former property owners who lacked knowledge about real estate transactions and offered to buy their owner-financed mortgages. Court documents indicate the defendants would offer to pay mortgage note owners up-front cash in exchange for their owner-financed mortgages—and therefore the right to receive monthly mortgage payments. Some of the former property owners were retirement-aged. State investigators believe they were targeted because they were likely to be enticed by the promise of up-front cash rather than a 20 to 30-year payment stream.
Under Texas law, it is generally legal to purchase and sell interests in real property, including the rights of owner-financed mortgages. However, the defendants are charged with perpetrating a complex scheme that relied upon obscure contractual provisions to defraud former property owners with little or no financial or legal expertise.
For example, one former property owner had previously sold his property to a buyer, who still owed $76,500 under the terms of the owner-financed mortgage. The defendants offered to pay the former property owner $30,000 cash in exchange for the right to receive the full $76,500 in future mortgage payments. Once the former property owner agreed to the $30,000 offer, the defendants drew up a contract and had the underlying property appraised. Unbeknownst to the former property owner, the contract provided that the defendant’s cash purchase price would be reduced if the property’s appraisal amount was less than the purchase amount—despite the fact that the mortgage would still yield the same amount of money regardless of the property value.
After learning that he would be paid the lower appraised amount—rather than the original $30,000 agreed-upon price—the former property owner attempted to reject the deal. In response, the defendants filed a lawsuit against the former property owner in an attempt to force him to accept the lower amount of money. At one point, defendants Enhance and Templeton had as many as 75 lawsuits on file in the Lubbock County District Court. According to state investigators, the scheme orchestrated by Enhance and Templeton was specifically designed to defraud individuals who lacked knowledge or experience about complex real estate transactions. The State’s enforcement action alleges that the defendants’ dealings with the former property owners were not only deceptive—but that they violated Texas property laws.
In addition to restitution for affected property owners, the State is seeking civil penalties of up to $20,000 for each violation of the Texas Deceptive Trade Practices Act.
Enhance has been in business about 10 years, according to information on its website.
Enhance’s case contends the state has no case in part because the state’s commercial code defines a consumer as someone who buys or leases goods or services, which means the mortgage note sellers are actually not consumers under the statute.
In addition, the cash flow note investor says in its pleadings that Texas law gives the buyer, rather than the seller, the right to rescind a sale.
The issue first became public a year ago, when a local television station investigated complaints related to a number of breach of contract lawsuits Enhance filed against people who sold mortgage notes to the company.
At issue was a practice in some transactions in which Enhance would make an offer for the mortgage notes based solely on the seller’s statements over the phone about the loan’s terms, the borrower’s payment performance and the value of the property.
The seller would sign the contract, which included a clause that bound the seller to go through with the sale at a lower price if due diligence determined the seller had provided erroneous information about the mortgage note.
If the seller balked at the lower price, the state’s suit says, Enhance would sue the seller.
Those disputes were related to claims the sellers made to the mortgage investor about the value of the loans, said Lubbock attorney Jerry Corbin, who is representing Enhance.
“People call us to start the transaction,” Corbin said, adding that someone from the company takes information from the mortgage note seller over the telephone, including the face value of the mortgage note, how much principal remains to be paid, the interest rate and what the borrower’s payment history is.
The company promises an offer within 24 hours, the attorney said, adding there’s no problem when the person selling the mortgage is truthful, and has all the information at hand.
In some cases, he said, people either don’t know, or aren’t honest about aspects of the transaction.
The state’s lawsuit criticizes Enhance for waiting until after the transaction closes to conduct due diligence on the contract, but Corbin said the company’s practice is the industry’s norm, and that the company wouldn’t invest several thousand dollars for due diligence on each mortgage note it is approached about buying.
In some cases, he added, the property’s appraisal comes in substantially below the original amount of the mortgage, or the note turns out to be a no-interest mortgage.
When that happens, Corbin said, the business has no choice but to reduce the price it pays for the note and seek a partial refund from the seller.
“The AG has the idea that the individual is always the victim, and big business is always wrong,” Corbin said. “He always takes the side of the individual, like the individual never lies.”
The state’s case is based on four lawsuits that have already been resolved in Lubbock courts, Corbin said, and Enhance’s lawsuit accuses the attorney general’s office of trying to re-litigate those cases as if it were an appellate court.
Local courts have already ruled on the cases and made adjustments, Enhance’s suit says, which makes the state’s damage request — $20,000 in civil penalties per violation of the Deceptive Trade Practices Act; $250,000 in civil penalties per violation if the consumer is over 65; and surrendering all money taken from consumers through the deceptive practices — extreme and not supported by state law.
The state’s suit contends Enhance’s contracts are written to favor the business over the note sellers, such as a clause that allows the company to seek a variety of damages in court in the event the seller defaults on the deal, while the business would only have to pay the seller $10 in the event Enhance defaulted on the deal.
— Excerpted from several articles, including a Nov. 17, 2010 storye in the Lubbock Avalanche-Journal by Walt Nett