In Tucson, Arizona, some first-time homebuyers were entering into purchase contracts with real estate investors who offered to carry the financing. The homebuyers put down a small payment at closing. Post-closing, they hand delivered their monthly mortgage payments to the seller (a real estate investor).

Each of the transactions was structured as a wraparound mortgage. Wraparound mortgages are sometimes referred to as an all-inclusive deed of trust or mortgage. It means the seller remains financially responsible for the existing loans secured by the subject property. 

In simple terms the transaction can look something like this:

*The $90,000 carryback loan wraps the balance of an underlying loan at a lesser interest rate. In this example the underlying loan is $80,000 at 4% interest. The seller earns interest on the full loan amount of $90,000 at 6% and pays a portion of the interest and principal each month to pay down the $80,000 loan. The seller is earning 2% interest on the $80,000 balance due the underlying lienholder. 

The homebuyers were not aware (or did not completely understand) the seller already had loans secured by the properties and was supposed to pay a portion of the buyer's monthly payment to the underlying lender to keep the payments current. 

Unfortunately for these homebuyers, the seller became greedy and instead of paying a portion of the monthly payment to the underlying lender, he kept the entire payment and allowed the underlying loans to go delinquent — and eventually into default. 

It is a tricky situation, since the homeowner is not the borrower on the underlying loan, the delinquency notices went to the seller and not the property address. Therefore, the homebuyers were not made aware of the delinquent payments until months had passed. 

The homebuyers were not notified until a public notice of an impending foreclosure was posted on their front doors. The notices came with threats the homeowners would need to vacate the premises within 90 days. 

The homeowners complained to local authorities and now the Arizona Attorney General (AG) is actively investigating the seller who ripped off the homeowners by failing to pay the underlying liens. The lawsuit initiated by the AG's office states the seller failed to make his loan payments despite taking thousands of dollars of down payments from customers and promising to apply their monthly payments to the underlying mortgage. 

How can inexperienced homebuyers protect themselves from this type of devious plot? 

Solution: The homebuyers need to employ the services of an account servicing agent. On a seller carryback loan with one or more remaining underlying liens, the account servicing agent collects the monthly payment from the homebuyer, pays the underlying liens first, and then pays the seller the balance.

If the homebuyer stops making monthly payments, the account servicing agent sends out delinquency notices to both buyer and seller. Everyone is apprised of the situation and there are no surprise notices posted to the subject property. 

When private parties are entering into a loan, suggest they set the servicing up with Loan Care. The Fidelity Family of Companies includes a top national loan servicer and account servicing company called Loan Care which can be found by visiting www.myloancare.com.

When establishing this service on behalf of the buyer and seller, it is best to provide the servicing agent with a copy of the note and deed of trust or mortgage in advance of closing to be sure the servicing agent can service the note and all its repayment terms. 

Advance copies of the note and deed of trust or mortgage is essential to obtain a fee quote for the set up and monthly maintenance of the account. Below are services offered by an account servicing agent that are essential in all private party notes, not just wrap around loans. The account servicing agent will: 

1. Hold the original loan documents, including releases
2. Service impound accounts for taxes and insurance
3. Keep a record of payments made
4. Provide payment coupons and billings
5. Provide payoff statements
6. Provide annual interest statements and reporting to the Internal Revenue Service (IRS)
7. Release the deed of trust or mortgage in whole or in part as directed by the beneficiary or mortgagee