WHY I FEEL SUBJECT TO LOANS SHOULD BE ILLEGAL IN ALL STATES

This is a real life scenario, but the names have been changed to protect the privacy of the individuals.

This is what I found a few weeks ago while screening a rental application a sweet older couple who said they have lived in the same home for 20 some years. Their application listed a landlord for the home they lived in, so I assumed they were renting. I was surprised to find a mortgage on their credit report. Both the husband and wife had excellent credit history except for this one mortgage that had only been paid on-time 6 times in the last 23 months of history that was displayed. Most of the payments were made 90 days late. My first thought was that they applied for our rental because they were going into foreclosure on the house they lived in and were not renting after all. Sometimes applicant's do lie after all. Then I checked our tax records and their names didn't show up as owner of record on a single property in our market. Before calling them the only logical explanation I could come up with at that point is that they had a property in another state that was a rental property gone bad or that they had co-signed a loan for a deadbeat relative. I couldn’t wait to hear the story, and the call went something like this.

ME: “This is Patti Robertson with Tidewater Homes. I’m working on the application you submitted to rent the house on ABC Street. Is it OK if I ask you a couple of questions?”

MR. SMITH: “Sure.”

ME: “Are you currently renting or do you own the home you live in?”

MR SMITH: “We are renting.”

ME: “I see that both you and your wife have a mortgage showing up on your credit report.”

MR SMITH: “Yes, that’s for the house we live in/"

ME: “But I thought you told me you were renting, and I can see that the name on the tax record shows the owner as someone else. Did you sell SUB TO BUYER your house?”

MR SMITH: “We didn’t realize it at the time, but that’s what we did. Back in 2009 we got a little behind and the bank was talking about foreclosing. SUB TO BUYER came knocking on our door and said he found our name on a list somewhere. He said he could help us out by catching our payments up and we could stay in the house. The way he explained it we were going to make our payment to him each month, along with a little extra to repay him for the catch-up loan, and he would make the payment to the bank. We understood that he was going to make our payments to the bank on-time, which would improve our credit and save the house. It seemed like a win-win. It went along that way for a right long time with us making our payments to him and us living here, no problem.”

ME: “And then what happened?”

MR SMITH: “Well, we kept right on making our payments to him each month, but then we started getting notices from the bank saying the payments were not being made. SUB TO BUYER always told us he had it taken care of, but earlier this year he stopped returning our calls. We got nervous about the bank notices and decided to refinance the loan so we could start fresh and take over the payments to the bank ourselves.”

ME: “And that’s when you found out you didn’t actually own the house anymore.”

MR SMITH: “That’s exactly right. I don’t really know how he did it, but SUB TO BUYER basically took title to my house without me even knowing.”

ME: “And what about this other address that shows up on your credit report – 456 DEF Street? Did you sell that one to SUB TO BUYER too?”

MR SMITH: “No. I’ve never heard of that address. Why are you asking me about that?”

ME: “Because according to your credit report you have used this second address on an account that was submitted to the credit bureau. Hang on a second. Let me look at the city tax record for that home…. Interesting. SUB TO BUYER purchased that home in 2013. That one is now being reported as having a foreclosure notice this year too."

That’s when I explained to Mr. Smith what it means to sell your house to someone subject to the existing mortgage. He basically gave away the only major asset he had to SUB TO BUYER and agreed to keep the liability associated with that asset, the mortgage, in his name, in exchange for SUB TO BUYER making his payments to the bank. (NOTE: This house has about $100K in equity in it right now based on the outstanding balance reported on the credit report.) I pointed out that there was likely a clause in their agreement that required SUB TO BUYER to make the payments on-time, but Mr. Smith said he was bad with paperwork and wouldn’t know where to look for them. I asked if he remembered if they signed the paperwork in an attorney’s office, hoping he would remember which one, and he said he didn’t think so. Mr. Smith said my explanation of the events made sense and was the first time he really understood what happened. I pointed out that had he just given the keys back to the bank 8 years ago in 2009, he would have long been back on his feet by now by the looks of his otherwise perfect credit. This outrageously delinquent mortgage was the only negative mark on either his or his wife’s credit reports.

The phone call ended with me telling Mr. Smith that we would be happy to have them move in our home, and based on their history I expect them to be excellent tenants for many years. It also ended with me being sick to my stomach that SUB TO BUYER is wrecking the image of investors with his predatory practices. Yes, I know there are a handful of responsible investors who buy a house subject to the existing mortgage and make every payment on time, which results in the improvement of the seller’s credit score. Sadly, if bad financial times come, the mortgage that doesn’t show up on the SUB TO BUYER’s credit report will be the last payment made if there isn’t enough money to go around. And this story, my friends, is why I believe that buying a house subject to the existing mortgage should be banned in every state.