Subprime was voted 2007’s word of the year by the American Dialect Society. As 2008 opens, other dubious mortgage loans are surfacing, ripe for nicknames.

One such loan has a familiar name — balloon payment. But this latest version could be called a “blimp payment.”

A lawsuit filed in December in Hennepin County District Court details the unfortunate case of South Minneapolis homeowner Stanzer Knox, who discovered that refinancing his house in early 2006 saddled him with, in effect, a 40-year mortgage.

Though he thought he had taken out a 30-year $185,000 loan, Knox and lawyer Mark Ireland eventually found in the fine print that he would have to make 10 years’ worth of payments all at once at the end of the 30-year term.

Total amount of the blimp payment? $121,062.58.

Such details of the loan emerged after Knox fell behind on his mortgage payments and was threatened with foreclosure proceedings in May 2007, Ireland says. Knox’s lawsuit claims that Homestead Mortgage Co., an Arden Hills-based business described as “inactive,” violated a number of provisions in the Real Estate Settlement Procedures Act, among other statutes. The current loan holder, a Delaware company called Mortgage Electronic Registration System (MERS), did not return MinnPost’s calls for comment.

Eye-popping trend
“The 30-year mortgages with a balloon payment at the very end is something that I didn’t even know existed before this case,” says Ireland, an attorney with the Housing Preservation Project, a nonprofit organization that created the Foreclosure Relief Law Project to develop legal strategies to deal with the issue. “And I’ve started to see more and more people walk through the door with those types of mortgages. All of a sudden you see more consumers call up, or you go to a foreclosure fair and you’re trying to calculate a consumer’s monthly payments or what their interest rate is, and you nearly fall off your chair.”

A balloon payment is usually set up for five, seven or even 10 years. Here’s how a seven-year balloon works: The borrower gets a 30-year, fixed-rate loan (meaning it amortizes in 30 years), but is responsible for a balloon payment after seven years. Most legitimate mortgage brokers allow balloons for individuals who will be in their homes for less than seven years. These borrowers get low interest rates and lower monthly payments because of the likelihood and “opportunity” to refinance at a higher rate.

But Knox’s interest rate was 9.910 percent, well above the market. His balloon saved him about $40 a month in payments, but then he faces the blimp at the end of 30 years.

Though the blimp was the eye-popper for Ireland, he also discovered that Knox’s loan was peppered with a number of Truth in Lending Act violations.

For one thing, Knox received three different disclosure statements, all containing conflicting information. And an index for determining Knox’s interest rate didn’t exist in any of the documents. In fact, one of the disclosure docs says, “If the index is no longer available, the note holder will choose a new index that is based upon comparable information.”

“How can you just pull a number out of thin air?” Ireland says.

Feeding frenzy continues
The thin-air rate and blimp payments indicate the market still hasn’t shaken off a five-year feeding frenzy by banks and lenders, Ireland and others say. Subprime loans, given to consumers with shaky credit, grabbed the headlines in 2007 because escalating adjustable rate mortgages were leading to foreclosures.

While some homeowners were swindled during the mortgage-lending process, Minnesota also is seeing a growing number of scams occurring during the foreclosure phase. The deals surface once a homeowner has racked up a number of late payments. Someone claiming to be a licensed mortgage lender or financial counselor slips in and offers to help them out of the mess for around a thousand bucks. Then they take the money and disappear into the ether.

According to Brian Bergson, spokesman for Minnesota Attorney General Lori Swanson’s office, the AG has filed two lawsuits against such specious companies in the past month alone. “These people are really despicable,” Bergson says. “And we’re seeing more and more of these scam artists as more consumers go into foreclosure.”

In July 2007, foreclosures nationwide reached an all-time high and then slightly declined. Yet housing advocates and experts predict the industry will be on squishy ground well into 2009. Approximately 22 percent of all loans in 2006 were subprime loans, according to Credit Suisse, which means there still are a number of foreclosures looming.

Any recourse for homeowners?
There’s no doubt that millions of homeowners are stuck with monthly loan payments that they didn’t realize would almost double. Not only can they not afford them, but they likely never could from the beginning. Yet the lack of transparency among mortgage lenders and brokers made it possible to write these loans like crazy. So what can be done if the loan terms are beyond unfortunate and are dubious?

First of all, the Truth in Lending Act violations follow the loan as it is sold, Ireland says. So whether it’s gone from one company to the next, to Wall Street and then to investors, the violations still stick. Though TILA violations were clear in Knox’s case, not all felonious loans have TILA violations.

In fact, when it comes to the additional balloon payments, Ireland says such terms could be violations of the Consumer Fraud Act, or be subject to false advertising claims, negligent misrepresentation or even what is known as “unconscionability.” Unfortunately, those with such mortgages only have three years to file a claim.

“A balloon payment at the end of 30 years is shocking,” Ireland says. “But even if there wasn’t that payment at the end, the consumer might have been misled. It really varies across the board as to what an individual’s circumstances were. The unfortunate part is that there aren’t many people looking out for consumers. This really is the first financial crisis of the globalized economy. And that’s why so many economists are frightened.”

MERS’ written response to the lawsuit says the company is proceeding with the foreclosure. However, because MERS and the loan servicer, HomeComings Financial, failed to respond to Knox’s written request to rescind his loan — a right he had because of the TILA violations — Ireland is seeking a trial to void the loan transactions with MERS and Homestead. The lawsuit also states that the companies are responsible for damages up to $1,000 for each violation. No trial date has been set.

Molly Priesmeyer writes about real estate, veterans and visual arts for MinnPost. She can be reached at mpriesmeyer [at] minnpost [dot] com.