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Wraparound Mortgages Are Legal, But Come With Serious Risks

Texas lawmakers are cracking down on wraparound mortgages, a practice that is perfectly legal, but has recently been used by predatory lenders in a manner that has resulted in foreclosure and financial ruin for homeowners.

Why Wraparound Mortgages Are Problematic

If used correctly by a reputable lender, wraparound mortgages can work: A home is sold with one mortgage in place. The buyer takes out a second mortgage that wraps around the first, typically at a higher interest rate. The wrap lender then uses the proceeds from the higher interest to pay off the first mortgage.

Unfortunately, predatory lenders have been collecting the higher interest loan payments and not paying off the first loan, which the buyer is now responsible for. This has led to many homeowners losing their homes to foreclosure and suffering credit damage.

What Lawmakers Are Proposing

Lawmakers are not proposing to do away with wraparound loans altogether. Instead, according to an article from the Statesman, they are taking steps to prevent wrap loan scams. A package of proposed bills call for clearer disclosure of wrap loans, closed loopholes and written consent of existing lienholders, among other protections.

Lawmakers have also recommended that if you are buying a home, follow the established channels. Do not fall prey to too-good-to-be-true offers that are seen on handwritten signs at busy intersections offering a home with no credit needed and a low down payment. Work with an established title company and a trusted attorney, avoiding unnecessary middlemen who are not working in your interest.

What If You Have Been The Victim Of A Predatory Lender

If you are now threatened with foreclosure because you fell victim to a wraparound mortgage scam, you may have options. You should discuss the matter as soon as possible with an experienced real estate lawyer who knows how to fight foreclosure and hold lenders accountable for fraud or other wrongdoing.

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