The state of Texas has filed suit against two Lubbock, Tex., mortgage companies it says exploited home sellers who were providing owner financing to homebuyers.

Owner financing has become more prevalent in the last two years because people who want to buy homes have a more difficult time qualifying for a mortgage. If the seller of the home owns it free and clear, they are free to "hold the note” themselves, collecting monthly payments from the buyer.

It may be one way to expedite the sale of a property, but it means it could be 20 or 30 years before the seller receives all the money from the sale. While that may be acceptable for some, sellers who are near retirement age will often need the money soon.

Enter a mortgage company, which offers to buy the note from the seller for a lump sum cash price. In many cases, the offer is about half what the mortgage is worth. The mortgage company buys the note, then collects the monthly payments, which include principle and interest.

There is nothing wrong with such an arrangement as long as the seller fully understands the terms, and that's where Texas Attorney General Greg Abbott has a problem with the two Lubbock firms. He says the companies and their owners orchestrated a complex scheme to defraud the original property owners.

Deceptive Trade Practices Act

The enforcement action names Enhance Mortgage Corp. and Templeton Mortgage Co. Inc. as defendants and charges both with violating the Texas Deceptive Trade Practices Act.

According to court documents filed by the state, Enhance and Templeton primarily targeted former property owners who had previously self-financed the sale of their property to independent purchasers.

According to state investigators, the defendants contacted former property owners who lacked knowledge about real estate transactions and offered to buy their owner-financed mortgages. Court documents indicate the defendants would offer to pay landowners up-front cash in exchange for their owner-financed mortgages—and therefore the right to receive monthly mortgage payments. Some of the former property owners were retirement-aged. State investigators believe they were targeted because they were likely to be enticed by the promise of up-front cash rather than a 20 to 30-year payment stream. 

Under Texas law, it is generally legal to purchase and sell interests in real property, including the rights of owner-financed mortgages. However, the defendants are charged with perpetrating a complex scheme that relied upon obscure contractual provisions to defraud former property owners with little or no financial or legal expertise.

Key appraisal

For example, one former property owner had previously sold his property to a buyer, who still owed $76,500 under the terms of the owner-financed mortgage. The defendants offered to pay the former property owner $30,000 cash in exchange for the right to receive the full $76,500 in future mortgage payments.

Once the former property owner agreed to the $30,000 offer, the defendants drew up a contract and had the underlying property appraised. Unbeknownst to the former property owner, the contract provided that the defendant's cash purchase price would be reduced if the property's appraisal amount was less than the purchase amount—despite the fact that the mortgage would still yield the same amount of money regardless of the property value. 

After learning that he would be paid the lower appraised amount—rather than the original $30,000 agreed-upon price—the former property owner attempted to reject the deal. In response, the defendants filed a lawsuit against the former property owner in an attempt to force him to accept the lower amount of money.

At one point, defendants Enhance and Templeton had as many as 75 lawsuits on file in the Lubbock County District Court. According to state investigators, the scheme orchestrated by Enhance and Templeton was specifically designed to defraud individuals who lacked knowledge or experience about complex real estate transactions.

The state's enforcement action alleges that the defendants' dealings with the former property owners were not only deceptive—but that they violated Texas property laws. 

In addition to restitution for affected property owners, the State is seeking civil penalties of up to $20,000 for each violation of the Texas Deceptive Trade Practices Act.