Rogue Refinancing Lender Leaves Homeowner Facing Foreclosure By Diverting Loan Payoff Proceeds Away From Existing Mortgage Lienholder

In Milwaukee, Wisconsin, the Milwaukee Journal Sentinel reports:

• Keon Williams is on the verge of being thrown out of his house - a startling turn of events, considering that for nearly three years since refinancing in 2008, he faithfully paid his monthly mortgage and his property taxes.

***

• Williams, an ex-Marine and single father of three teenagers, finds himself caught up in the continuing fallout from America's mortgage meltdown. His right to continue living in the home he bought, the home he has been paying for, is in jeopardy in the aftermath of the collapse of Central States Mortgage Co., the now-shuttered firm that was once the largest mortgage broker in the state.
• The problem: When Williams refinanced with Wauwatosa-based Central States in 2008, cutting his 12.5% interest rate nearly in half, Central States' affiliate, Interim Funding LLC, didn't pay off the original mortgage. [...] Williams - including one that he didn't know still existed. His small home at the corner of 44th and W. Keefe Ave., with a recent assessed value of $117,200, had become collateral for two loans totaling more than $265,000.

***

• The closing statement for the refinancing shows that $130,444 of the proceeds were earmarked for paying off the existing loan - but none of the money was paid to Amcore [the existing mortgage lienholder], according to its foreclosure lawsuit. Williams says he didn't receive a dime from the refinancing.

***

• Williams' case is not unique. Litigation pending in Milwaukee County Circuit Court details four similar cases involving mortgages written by Amcore with a total value of nearly $500,000. Also, in 2009, Associated Bank persuaded a Milwaukee County judge to freeze $2 million of Central States' assets when the bank charged that Central States borrowed money from Associated to finance 13 mortgage loans, and then sold 12 of those loans to investors - but didn't pay off the original loans after the mortgages were sold.

***

• Williams recently filed a claim on the title insurance policy underwritten by Stewart Title Guaranty Co. in Houston, said Geoffrey Gnadt, Williams' lawyer. Gnadt said Flagstar Bank also filed a claim. [...] "This is essentially a business dispute between Central States, Amcore and Flagstar - they're big boys," Gnadt said, contending that the banks, not Williams, should be looking to title insurance for relief. "There are ways for the banks to be made whole, rather than going after the little guy."(1)
• Central States is in receivership and at the center of a 2-year-old FBI investigation focusing on dealings between it and the credit unions that owned it and Interim Funding.(2)

For more, see Milwaukee homeowner paying on time, yet facing eviction (Refinancing, collapse of Central States leaves him with 2 mortgages).

(1) While this may sound unconventional, this story lends support to the proposition that homeowners should update their existing title insurance policies when refinancing their mortgages. This way, when a refinancing like this takes place, the homeowner need only file a claim with their title insurer over the unpaid existing mortgage and let the underwriter clean up the mess (An owner's title insurance policy purchased when a home is originally purchased only insures against title risks existing as of the date of purchase; in this case, the problems arose in connection with liens that did not exist prior to the original purchase date).

(2) See Subprime mortgage loan canceled (Man says he was duped into buying north side house) for another example of the dubious dealings in which the now-defunct mortgage banker Central States Mortgage Co. had its hands in.