A loan that’ll get ugly fast

[Doofrat]

My old neighbor moved recently and when he was applying for a loan, he specifically stated that he wanted a fixed loan. Well the broker agreed, then tried to get him to sign paperwork for a variable. He caught it, but it gives you an idea of how much pressure they try to sell these junk loans with. Anybody know how much more commission these loans get?

[lindismith]

I have a friend who is a mortgage broker, I’ll ask him about the commissions.

Ben’s blog had over 300 comments on this article. It really had an affect on my all day yesterday – I just keep thinking about how many people are in the same boat as this guy. Can anyone put my mind at ease and show me how this is all going to be ok?

This guy is only 55 years old. He has no savings. No plan. How many more are like him? Are we going to foot the bill for all these people when they ‘retire’?

[kev374]

Besides the term “Suicide mortgage”, they are also called “Neutron mortgage” because they have a fuse that blows up at a later date and kills everyone but leaves the building standing…that is how Businessweek magazine put it in it’s recent article.

Link from MortgageDailyNews

The original Businessweek article

[Daniel]

“Are we going to foot the bill for all these people when they ‘retire’?”

I’m afraid so, Lindi, I’m afraid so…Don’t know who’s the real loser here, Mr. Hertzberg who blew away all his equity, or me for having to pay for his retirement…

[BikeRider]

“Why would people who can afford conventional 30-year mortgages sign on to Option ARMs especially if the fees are higher with prepayment penalties? ”

I’ve wondered why they would and I think it is because they forget about RISK. Risk that the home value will decline, risk that they could lose their job, risk that the market will go south. I think I have read often where people have actaully drawn out the equity in their home and invested it. To me that sounds crazy, but I do not have any stomach for risk. I guess if you can sleep at night, even leveraged like that, then you are fine.

[gold_dredger_phd]

I don’t understand why this idiot doesn’t rent out the two remaining rooms in his house and get *any* job. He’s a big man and could get a job as a security guard or something. It’s not like he has to please his wife or worry about rooms for the kids or pets. He could probably get $500-600 per month per room renting. Then half of his mortgage would be paid for. It never seems to occur to these people to get a job.

He’s like that guy from, “Iamfacingforeclosure.com” who always ignores any advice to get a job. I guess they consider themselves too clever to get a job to pay the bills. What a total loser.

I love the fact that he invested in “dot-com” stocks and then commodities. Looks like he caught the tail end of each of those trends just like the housing trend. People like this should not own houses anyway.

[no_such_reality]

Unfortunately, the sooner people like the one profiled get busted out and sent to a crappy little apartment in a cruddy part of town because they’ve been foreclosed on and filed BK, the better off all of us will be.

Sadly, I suspect we’re going to see ‘relief’ efforts from the government on this because just like Mr. H, the broker deceived him. Apparently, so did his investment brokerage on dot-com stocks, the commodity traders and the travel agent which he once was on that around the world trip shoting photos…

[lindismith]

It’s all so sickening.

Here’s the answer I got from my mortgage broker friend about the commissions on option arms: (I changed the name of the party to X, and the name of the company to ABC)

“A lot of brokers rip off the clients on this loan. One of X’s loan officers just closed one last week and made over $20,000 on a $450,000 loan, not uncommon. ABC Co. is a local brokerage notorious for this. The reason so much money is made on these loans is that the lender will pay the broker up to 3% of the loan amount if the broker jacks up the margin on the index to it’s maximum, therefore increasing the actual interestrate on the loan. The borrower is usually not aware of this because it does not affect the monthly payment which is based on a 1% intererest rate. The actual rate the borrower pays is the index plus the margin, which might be, say, 7.0%. The difference between the 1% the borrower pays every month and the payment at 7.0% gets added to the loan amount every month.

Many of these brokers will also charge the borrower 2% (2 points) on top of the 3% they get back from the lender which is not often disclosed. So although the broker might say he is not getting a rebate from the lender, he most likely is.

On regular fixed rate loans it is much harder to do this because people shop the rate, which is directly related to the brokers rebate. On the option arms, people don’t shop the margin, and they should.”

[no_such_reality]

Lindi, it’s easy, most people stop listening after they hear your minimum payment will be —-

Both the index and the margin is spelled out in the loan.

Since most people don’t understand what paying the minimum on a credit card does, I wouldn’t expect them to understand an option ARM. All an option ARM is bascially a giant house secured credit card.

[Daniel]

“Both the index and the margin is spelled out in the loan.”

I was surprised to find out that I couldn’t find either the index or the margin on regular ARMs advertised on a major prime lender website. So we’re not even talking here about suicide loans, just plain vanilla ARMs at prevailing market rates. And not some fly-by-night mortgage broker, but a fairly reputable lender.

I read the fine print, I read everything, it simply wasn’t there. They only published the initial rate and the APR (these are required by law, I believe). I’m sure the final paperwork the borrower signs has all the details, but… come on! Is it so hard to write “6 month Libor + 1.75%”, or whatever it is? The index and the margin are the two most essential pieces of information on a loan, and somehow they “forgot” to post them.

[powayseller]

The guy loses, but who wins? Banks? Rich people? Bankruptcy does not wipe out your debt does it? Lindi, can you find out from your brother who ends up with all the money when these houses are foreclosed on?

[TheBreeze]

Good question, poway. I always assumed that mortgages were only backed by the house. If that is the case, then if the owner of the house defaults on the loan, the only recourse for the holder of the loan is to foreclose and sell the house. However, in today’s market, the house is likely to sell for much less than the balance left on the loan.

It looks like the big winners here are going to be the CEOs of the companies like FED and others mentioned in the Business Week article. Because FED can book the full payment amount even when the borrower is only making the minimum payment, these option ARMs are a way for CEOs to boost short-term earnings at the expense of the long-term health of the company. This allows CEOs to cash out their stock options in the short-term leaving long-term holders of the stock holding the bag when they borrowers eventually default and the foreclosed house is worth only a fraction of the balance left on the loan.

I believe these option ARMs have enabled the housing bubble to inflate to several times the size it would have otherwise have been. Which means we’re going to see that much bigger of a pop in the near future.

[powayseller]

Yup, the CEOs of Lend and WaMu struck it rich selling stock options, and after their stock price plunges over the next few years, they’ll be long gone. The big banks, the Fed Reserve member banks, will go on as if nothing happened I suppose. They’ll buy up WaMu for pennies on the dollar. The rich get richer. The losers are the guy who lost his house, and the shareholders of the losing bank and the MBS holders who didn’t hedge or do swaps or whatever they do. This will just result in another distribution of wealth from the poor working fool and taxpayer to the rich people (CEOs, bankers, cash-rich investors who’ll snap up foreclosures). That’s how it’s starting to look. I’m not saying this was planned, because that would have been a very complex plan. But that’s how it’s turning out.

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