42. Mortgage Flim-Flam

by H. W. Moss

If you have a mortgage, beware. Paying someone to accelerate your payoff is a rip-off.

The pitch arrives in the mail apparently from your lender on corporate letterhead, obviously with your real lender’s full cooperation.

Under the guise of a “service” to customers the headline offers “personal benefits” of thousands of dollars to borrowers.

“Equity Accelerator will electronically deduct a portion of your mortgage payment from your designated checking account after each payday (weekly, every two weeks or twice per month.),” the letter states. “By making payments this way, you accumulate extra funds that are applied directly to principal.”

But this offer is not from your lender. It may come from Aegis Financial in San Francisco or Bisaver, headquartered in Springfield, Virginia. Both are much the same although Bisaver carries a note of desperation. “For a limited time,” their letter begins, “you can slash both the time and expense that stand between you and mortgage-free homeownership.”

Reading the fine print on the Aegis pamphlet you learn the charge is a one time fee of $295 and a $5.42 monthly fee for this service. That’s $360 the first year and $65.04 per year after that. Bisaver costs just about the same.

In fact, there is nothing of value in these offers that you cannot do on your own, only additional expense. Anyone may accelerate their principal reduction at any time. The terms of the original mortgage determine whether or not the borrower has a pre-payment penalty and almost all mortgages allow some pre-payment with no penalty during some portion of the loan’s life.

“The Flim-Flam Man” is a novel by Guy Owen. It teaches the art of fleecing yokels and was made into a fairly decent film starring George C. Scott and Michael Sarrazin in 1967. This type of mortgage acceleration smacks of flim-flammery. It is a confidence scheme preying on people who may not realize how costly this method is.

“It isn’t just little old ladies who buy into this,” observed Debra Shatford, a former mortgage broker. “Sophisticated business people fall for it too.”

It is quite true there are many benefits to increasing your principal pay down. These include a shorter loan life resulting in increased equity which may reduce the lender requirement that you carry mortgage insurance and, as promised in the accelerator letter, the savings of thousands of dollars in interest over the life of the loan.

Everyone should do this as a matter of course on their own initiative.

The scenario works best on fixed rate mortgages. If you have an adjustable rate mortgage, increasing the principal eventually reduces your monthly payment. That is not true in a fixed rate mortgage, because the same level payment amount remains constant over the life of the loan. Inside that payment the component parts — principal pay down and interest — do change with the same beneficial results: shortened loan life, interest savings and increased equity.

However, it does depend on when you start. For each year that passes, the benefits drop.

“You will shorten a 30-year loan to a 15-year loan if you make four extra payments per year not including taxes and insurance,” said Suzanne Thomas, Colorado author of Rental Houses for the Successful Small Investor. Alternatively, she said, “One extra payment a year shortens it to a 23 and 3/4 year loan.”

Chase Manhattan Mortgage Corporation of Ohio buys loans. Then they give a third party with whom you may never have done business, Equity Accelerator which is a subsidiary of Aegis Mortgage Acceleration Corporation, a lot of very private information including your loan number, its current balance, the original amount you borrowed, what type of loan it is and what rate you pay.

A representative at Aegis said they work with about 30 banks including Norwest, Washington Mutual, National Bank of Alaska, CitiCorp and First Union. Aegis is not licensed by the California Department of Real Estate (DRE) or the Department of Corporations. A spokesperson at Aegis said they do not need to be licensed because they are a Delaware corporation and not actually collecting funds.

The DRE has a different take on the subject of licensing.

“Arguably, the act of soliciting a prospective client triggers a license,” observed Tom Pool, managing deputy commissioner at the DRE. “Part of licensed activity is defined as performing services for borrowers or lenders in connection with loans secured by real property.”

It is a wise idea to pay your mortgage off early. However, consumers may do it on their own initiative rather than bind themselves to a contract and they should think twice before using an accelerator company.