The 203(k): A mortgage horror tale

Posted: March 21, 2010

Phil Acutanza introduced himself saying he didn't think I needed to hear another mortgage horror story.

Well, Phil - and everyone else - my week wouldn't be complete without one.

Acutanza's story - "a 203(k) nightmare," he calls it - actually involves his stepson, Leonard Russell, and the house Russell bought Nov. 6 with an FHA 203(k) loan arranged by a broker, who sold it to Bank of America.

First, let me explain what a 203(k) loan is. The U.S. Department of Housing and Urban Development's chief program for the rehabilitation and repair of single-family properties is called 203(k). Through it, a borrower gets a single loan for the purchase and rehabbing, based on the projected value of the property with the work completed and accounting for the cost of the work.

To lower the lender's risk, HUD fully insures the loan when its proceeds are disbursed. An escrow account is established for the construction work.

Sounds good, but as I noted in a January column, 203(k)s don't work as well as the advertising suggests.

That column was about John Summerill and Catherine Felton, who purchased a house in Port Republic, N.J., with a 203(k) loan sold to Bank of America. They started renovations after being promised that the first draw for the work would be sent within 15 days of closing.

The check arrived more than three months later, after the couple had spent $25,000 on the work, using their credit cards to pay for it.

Bank of America told me at the time that the average number of days from closing until the bank received a loan to begin servicing was between 25 and 30, and that it then took about 10 business days to get the first check out from there.

When she first contacted me, Felton said calling the lender's 203(k) line was a time-waster, and she sent me a link to a site populated by Bank of America 203(k) customers with similar issues.

Acutanza tells me that the lender now has a "203(k) disbursement hotline, created because of all the complaints about its 203(k) service."

Does it make a difference?

No, Acutanza says, because work on the house has been finished for months, and two contractors haven't been paid because the lender's check remains missing in action and "nobody at Bank of America thinks this is important."

The contractors finished their work by the end of November. The lead-paint-removal contractor forgot to finish his testing, "and as we were calling for the final disbursements, both mortgage companies were saying that all work had to be completed to cut the final checks."

The contractor finally finished. Final appraisal inspections were completed Jan. 15.

I need to mention here that responses from this "hotline" take a couple of weeks, and only if you e-mail more than once. Not so hot, I guess.

"When we informed BofA that everything was complete, they proceeded to tell my wife that those inspections were unnecessary and a waste of money," Acutanza said. "I called the 203(k) disbursement number, and they said that it would be seven to nine days to cut checks after final inspections and new title work were completed."

On Feb. 10, Acutanza called again to ask why new title work and additional inspections had to be done, believing it "a huge waste of somebody's money."

"They told us that it would be six weeks [from Jan. 15] before we would receive checks," he said.

On March 1, with the contractors more than a little upset about not being paid, Russell e-mailed the 203(k) disbursement hotline (it's called the "203k Buydown Escrow Holdback Group," actually), asking why six weeks had passed and still no check.

"We were told that it would be 60 days from the receipt of all the proper paperwork to receive the contractor's payments," his stepfather said.

"Of course, I still don't know from when you start counting the 60 days," Acutanza said.


Inquirer real estate writer Alan J. Heavens is the author of "Remodeling on the Money" (Kaplan Publishing). His home improvement column appears Fridays in Home & Design. Contact Alan J. Heavens at 215-854-2472 or aheavens@phillynews.com.

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