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How Toxic is Your Mortgage?
How toxic is your mortgage? That’s what BusinessWeek magazine wants to know (see the September 11th issue, on newsstands now):
While the article and accompanying sidebars and graphics focus on the many problems associated with adjustable rate mortgages and “mortgage payment reset” (topics FlippingFrenzy.com covered in the past), real estate and mortgage fraud are not entirely absent from the conversation:
Then there’s the illegal stuff. Mortgage fraud is one of the fastest-growing white-collar crimes in the nation, costing $1 billion in 2005, double the year before. A slower housing market could foster more wrongdoing. “With a tighter market, you are going to find there is more incentive to manipulate,” says Tim Irvin of Irvin Investigations & Research Services in Spring, Texas. “Brokers are having a harder time getting business, so they’re getting creative.”
Click here for a very detailed yet dummied-down article from a pretty well qualified source.
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As a lender, I was appalled by the number of loan officers who had no idea that the introductory rate was not the true note rate.
What is is that scientists say, we use only 11% of our brain capacity…..in these loan officers’ cases, I would say that number is more like 2%.
I am very afraid of the circumstances for our market should many of these, and other riskier ARM loans, fail in the next five years.
As you say, wrapping your head around the sum total of all the mortgage loans is one thing! But seeing people lose their homes because of less than forthcoming, or worse, stupid loan officers is indeed immoral, if not criminal.
Comment by Mary Supinger — September 5, 2006 @ 8:09 pm
Thus my continued case for licensing all mortgage originators and loan officers in every state regardless of their affiliation.
Let me respond, jpillow, that not all areas have experienced a “bubble” or even a slow down. Many areas of the country continue to experience a gain in housing starts and sales of existing homes along with a steady rate of appreciation. I know we all tend to see the entire nation through our local eyes.
This loan is a fantastic loan. I use it to aid in building my own wealth. Outside of myself for the over 2000 loans I have personally closed I’ve closed 4 of these loans. Total - four. This mortgage is not for those who intend to use the difference between their fully indexed payment and their minimum payment to support a shopping habit, an entertainment addiction or any other foolish behavior.
The greatest intention of this mortgage solution is for the self employed borrower who may receive large “spurts” of income throughout the year. This allows them to make the minimum payment through the slower months and to balloon during the good months. It’s also for money savvy borrowers who have a personally proven track record of turning pennies into dollars. I’ve used the difference between my fully indexed payment and my minimum payment to either acquire, rehab and resell homes in community redevelopment areas or even to fill the need for affordable housing in my area through new construction. I also ALWAYS make a principal reduction payment.
In fairness to loan officers let me say that the payment schedule (worst case scenario) is disclosed to the borrower on the Truth In Lending statement and signed by the borrower in accordance to RESPA guidelines. Also, when qualifying for this mortgage, the borrower is qualified on the fully indexed payment amount - not the minimum payment amount. So the borrower MUST prove their ability to repay the loan at the fully indexed rate making this no different from that perspective than any other interest only ARM.
I won’t link to them here but I’ve written a few in-depth articles on the subject of these loans and what makes them tick. The loan itself is not inherently evil but I fear the motivation of some loan officers may be.
Comment by Ken Cook — September 10, 2006 @ 12:41 pm
I agree with you about this kind of loan, Ken. It is a loan for those borrowers who are much more savvy than others.
Thanks for your article and comments!
Comment by Mary Supinger — September 18, 2006 @ 11:21 pm
I am a Realtor. In the last month, four of the five new listings I have taken are short sales. All of the owners got in trouble with option ARMS because they did not understand what they were getting into. I read years ago that only about 30% of borrowers understand what they are signing but sign anyway. Education is the key, not more Government regulation.
Did you see Countrywide’s CEO comments last week? Basically he said their clients were more sophisticated and did understand what they were getting into and they did not mind because they could always refinance. He also said they did not mind having to pay the pre-payment penalty. My clients have a differnt view.
Comment by David Alan Love — November 22, 2006 @ 12:18 am