This is weird. Just a couple of columns ago I wrote a piece on a builder's contract "loophole." This loophole involved forcing new home buyers to take crappy loans or else lose their deposit. I ended with the column by stating that surely there wasn't any national conspiracy by builders to screw consumers … but then I got yet another email from another unfortunate homebuyer pleading for help.

His name is Prakash, and he's buying a new home built in Montgomery County in the Washington, DC area. Mind you, I tried to contact both the builders sales reps as well as the loan officer, but didn't get anywhere after several attempts. The builder didn't return any emails and the loan officer said he couldn't talk too much about his "clients" loan. This means that this story might be completely fabricated. But I doubt it.

"Dear David," he writes. "I am in this exact same situation that you have described -- with one addition. I have not been able to sell my current home to buy the new home. The builder is asking me to accept an interest only loan where the monthly payments are more than my monthly income."

In this twist, he couldn't qualify for the new home because he's been unable to sell his current one. He wanted to use the proceeds from his old home to help buy the new one and keep the payments down. But he hasn't been able to sell and he's about to lose his $68,000 deposit if he doesn't take the new loan offered by the Builders' mortgage company.

Because his monthly income is $4,800 and his interest-only payment is $5,200 -- the guy can't afford this house, get it? Apparently the loan officer doesn't care. And he's pointing a financial gun to Prakash's head, basically saying, "It doesn't matter if you can't afford it, if you don't take the loan you'll lose your deposit with the builder."

Again, according to Prakash, since he couldn't qualify for the new loan let alone two, the loan officer flipped him into a "no ratio" loan whereby no income is used for loan approval therefore no ratios are calculated -- hence "no ratio." To add insult to the injury the loan also carried a prepayment penalty and a second mortgage rate at about 10.25 percent and change. Gee, thanks.

The contract with the builder said that if Prakash couldn't find financing they would provide him with a loan and that also if he didn't follow through with the terms of the contract (taking the loan offered to him) he'll lose his $68,000. The loan officer told Prakash that whatever contract he made with the builder was out of his hands and that if he didn't like the terms of the loan being offered he could always walk away from the deal -- $68,000 lighter.

Likewise, the builder told him they're not responsible for the type of loan being offered, just that he had agreed to buy the house if the builder found him a loan. Ouch.

Two weeks ago it was some guy that also couldn't afford a home payment so the builders lender offered up a less than stellar offering that could ultimately result in foreclosure. Then just this past week it was Prakash, who sent me his desperate email needing help with his situation. From the same area. Under the very same circumstances. The buyers couldn't qualify for a loan for whatever reason so the builder's mortgage company conveniently provided a bad loan. Just to close the deal.

Here are Prakash's choices: He doesn't take the loan so he loses his $68,000. Or, he does take the loan, moves in and is foreclosed upon in about 90 days. And both the builder and the builder's mortgage company wash their hands of the whole affair.

Oh, I forgot something else Prakash told me. Since he couldn't make the mortgage payments on the new house the builders mortgage company was going to loan him another $40,000 to help him make the house payments on the new house while his old one still sets listed. What a great guy. How nice of that loan officer to help Prakash when he needed it the most. Loaning him the money to make house payments on a No Ratio loan that was likely going to go into foreclosure yet the loan officer still gets paid, the sales rep still gets his commission and Prakash gets screwed.

I might be changing my mind on the conspiracy theory. How do people like this sleep at night?

Published: January 20, 2006

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.