Posted on 06/22/2006 6:41:43 AM PDT by Hydroshock
Being a professional mortgage lender and broker, I like to believe that most of us in the business are honest, reliable and knowledgeable. While this is true to a large extent, the relatively few bad guys in this business make us all look bad.
The housing market has cooled and interest rates are on the rise. What's a mortgage broker to do? Well, it's pretty clear that many of them are getting a bit more aggressive in their marketing techniques. Over the last few weeks, I decided to pay close attention to the myriad of mortgage advertisements that constantly bombarded me. If something appeared fishy, I followed up.
Lenders are heavily promoting the so-called "Option ARM." Basically, an Option ARM is a monthly adjustable mortgage that gives the borrower multiple monthly payment options. The borrower can choose between making a payment based on a 15 year amortization, a 30 year amortization, an interest only payment, or a rock bottom minimum payment that carries negative amortization. For folks who are unfamiliar, negative amortization, or "neg-am," occurs when the minimum payment does not cover the interest charged, increasing the balance every month.
I was a big fan of Option ARM programs for the first few years of this decade. Why? Not because of a negative amortization feature, but because these programs are tied to short term interest rates. From mid 2001 until mid 2005, short term rates were hovering between one and 2.50 percent, allowing a fully indexed mortgage rate of three to 4.50 percent. The rates were unbeatable.
Now that the Federal Reserve is on a rate hike campaign, these mortgage deals aren't what they used to be. Fully indexed Option ARMs carry rates in the 7.50 percent range -- more than double what they used to be. Many lenders, however, are silent about this fact when they advertise. Here's a sampling of my research.
I receive a letter in the mail from a mortgage company that touts a debt consolidation loan with an Annual Percentage Rate (APR) of 2.40 percent. An APR is required by federal law to be disclosed on any advertisement that quotes and interest rate. I knew right away a mortgage loan with an APR of 2.40 percent didn't exist. When I called the company for clarification, they told me that the letter contained a "typo" and that the 2.40 percent was a "payment rate" that carried negative amortization. Yeah, right.
I receive another letter from a company that says I am "part of a select group of homeowners to take part in an exclusive mortgage rate reduction program." Seeing as the interest rate on my current mortgage is 5.50 percent, far below market rates, I decided to call for more information. Sure enough, the woman on the line tells me that I was selected to take part in a payment reduction program, not interest rate reduction. It turns out that the program carried a variable rate that's fully indexed at 7.75 percent. The lower payment would have cost me $1,031 per month in negative amortization.
I'm driving back to the office after a lunch appointment and hear a radio ad that starts out like this: "If you're paying more than 1.25 percent on your mortgage, you're paying too much." I call the advertised toll free number and pretend to be an enthusiastic prospect. I ask the fellow on the phone some detailed questions. "Is the rate adjustable?"
"Yes, but the rate is fixed for the first five years."
"The actual interest rate is 1.25 percent for five years?"
"Yes, it a great deal"
This went on for a while. I kept offering the fellow opportunities for him to tell me that the 1.25 percent was a payment rate, not the actual interest rate. It wasn't until I identified myself as a mortgage professional and columnist when he fesses up that the product he was touting was indeed an option ARM with an interest rate of 7.50 percent.
I've got nothing against Option ARMs. They are indeed good for some folks. But the fact is that they're not a very good deal anymore for most folks because the interest rates aren't favorable compared to fixed rates.
Lenders are selling a low monthly payment. And when they sell a low payment, they must disclose that low payments have costs, such as negative amortization. The companies that advertise low payment rates as actual interest rates aren't just misleading the public, they're breaking the law.
If something sounds too good to be true, it probably is. Caveat Emptor.
ping
When bait and switch is encouraged in the Real Estate business by the DOJ in the Real Estate Brokerage business what do you expect?
The mortgage guys promoting these programs reek of slime in their radio ads.
Ultimtely it's the greed of individual consumers to get something for nothing that gets them into trouble with negative amortization loans.
Like it or hate the credit industry is out of control. The leaning standards are the loosest I have ever seen them. As rates keep going up I expect to see more of this type of shananagans from them.
22The blessing of the LORD, it maketh rich, and he addeth no sorrow with it.
Bad thing about prosperity is that folks blow off God and tell America to kiss off...
Yesterday's MPAA numbers gave the average for a one-year ARM as 6.22%; their average for a 30-year fixed was 6.72%. Anybody getting an ARM with the spread that small richly deserves their eventual bankruptcy.
That is the one think that troubles me and makes me thing the foundation of this mess is shaky. Rates have been at historic lows but people are still getting these risky loans. I would never buy a house I could nto afford 125% of the total payment, including taxes and insurance. And put at least 10% down on a 30 year fixed note.
"5 to 7 per cent interest was fair when homes cost $20,000. To me, those interest rates are usurious considering many homes cost at least "$500,000. "
Huh? So if I'm a lender, and I write 25 loans for $20,000 at 6% that's ok. But if I write one loan for $500,000 at 6%, thats usury?
The rate is the rate. I don't see where the amount principle matters.
I dub thee Willie Green II. May your reign be long and bountiful.
Who?
Before you came along, he posted the articles like this. He's gone now and you are more than worthy to take his spot.
ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ..........
I'm surprised they don't have prepayment penalties in these loans, too. That way, if you find you are getting screwed, you can't refinance your way out of it without paying thousands of dollars in penalties, too.
Are you ok earning 5% on your money market account? That's close to the current market rate. So do you think banks should charge you less for a home loan then they are paying you on your deposits?
No bank would survive if they did that. In fact, the FDIC would shut them down. The interest rate market is not controlled by the individual banks.
It doesn't get much better for consumers than the current interest rate environment. You can lock in a 30 rate of under 7% and earn 5% on a daily basis. Enjoy it, because the spread is usually closer to 4%.
Nope. Got no MMA. Don't owe anyone $500,000 bucks. I just think that all these people, that think that life is wonderful because they are making so much money, don't understand that the dollar value has been made worthless.
(Denny Crane: "Every one should carry a gun strapped to their waist. We need more - not less guns.")
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