Exotic loans alive and kicking

[donaldduckmoore]

toots, if the laws are really strict, then both the price of REOs and the must-sells must come down shortly. The Fed is allowing this to happen because they know that housing market is taking a big truck of the US economy and they do not dare to deal with that the hard way. Let us see what the senate will do to give them more pressure to change the rules.

[donaldduckmoore]

toots, if the laws are really strict, then both the price of REOs and the must-sells must come down shortly. The Fed is allowing this to happen because they know that housing market is taking a big truck of the US economy and they do not dare to deal with that the hard way. Let us see what the senate will do to give them more pressure to change the rules.

[Raybyrnes]

Maybe I’m missing something but why would there be anything wrong with a Neg Am Loan if you already know you can afford a 30 year fixed. Seems to me you would simply need to figure out if you could get a better rate of return on the 12 to 15 k you are saving on the payment. Not going to say that is an easy thiing to do but for those who are heavy into investing seems a lot chaeaper than margin rates or if I owned my own busing it is cheaper than an SBA loan. If on the other hand I could not afford the 3500 hundred payment and the neg am was the only way I could get into the home I would would tend to think that this would be an inappropriate product.

This guy might have been a schmuck but I would want to know the difference between payment on an ARM and 30 year fixed if I were making a decision.

[donaldduckmoore]

HLS, I feel that there is confusing about the word “subprime”. Was it original used to describe the buyers that are under prime but no loan is subprime, am I right?

[Raybyrnes]

Maybe I’m missing something but why would there be anything wrong with a Neg Am Loan if you already know you can afford a 30 year fixed. Seems to me you would simply need to figure out if you could get a better rate of return on the 12 to 15 k you are saving on the payment. Not going to say that is an easy thiing to do but for those who are heavy into investing seems a lot chaeaper than margin rates or if I owned my own busing it is cheaper than an SBA loan. If on the other hand I could not afford the 3500 hundred payment and the neg am was the only way I could get into the home I would would tend to think that this would be an inappropriate product.

This guy might have been a schmuck but I would want to know the difference between payment on an ARM and 30 year fixed if I were making a decision.

[donaldduckmoore]

HLS, I feel that there is confusing about the word “subprime”. Was it original used to describe the buyers that are under prime but no loan is subprime, am I right?

[HLS]

SUBPRIME lenders are willing to take a bit more risk, and GENERALLY (there are ALWAYS exceptions) prime lenders wanted a minimum mid-score of 620…
If you were 619 or below, you were usually subprime.
It all starts with your credit score…

For various reasons, even people with 700+ scores sometimes cannot get a prime lender loan.
Lending is based on rask & reward to the lender, based on their rules. You don’t explain away a 540 credit score.

The ignorance of the media and general comments made about subprime do nothing to explain the realities, and until the implosion, most people didn’t even know that subprime existed,and still don’t know what it really is.

The BIGGEST difference between Prime and Subprime is Prepayment Penalties. Subprime loans come with them, and will cost you to not have them.
Prime loans don’t come with them, but may save you money if you take one.

Once a loan is funded, the terms stay what they are, regardless of who buys it or does the servicing.
A loan is a loan.

You are correct, the borrower is considered subprime, and get loans from subprime lenders.

A subprime loan isn’t a “junk bond” to the borrower, but it could be viewed as one to the investor.

[HLS]

SUBPRIME lenders are willing to take a bit more risk, and GENERALLY (there are ALWAYS exceptions) prime lenders wanted a minimum mid-score of 620…
If you were 619 or below, you were usually subprime.
It all starts with your credit score…

For various reasons, even people with 700+ scores sometimes cannot get a prime lender loan.
Lending is based on rask & reward to the lender, based on their rules. You don’t explain away a 540 credit score.

The ignorance of the media and general comments made about subprime do nothing to explain the realities, and until the implosion, most people didn’t even know that subprime existed,and still don’t know what it really is.

The BIGGEST difference between Prime and Subprime is Prepayment Penalties. Subprime loans come with them, and will cost you to not have them.
Prime loans don’t come with them, but may save you money if you take one.

Once a loan is funded, the terms stay what they are, regardless of who buys it or does the servicing.
A loan is a loan.

You are correct, the borrower is considered subprime, and get loans from subprime lenders.

A subprime loan isn’t a “junk bond” to the borrower, but it could be viewed as one to the investor.

[donaldduckmoore]

Thanks HLS, that really clarifies a lof on definitions. Another quick question, if I have score over 700, then how would I know if I am having a prime or subprime loan before we close the escrow? It looks like the terms of either loan could be the same (5/25, 3/27 ….), am I right?

[donaldduckmoore]

Thanks HLS, that really clarifies a lof on definitions. Another quick question, if I have score over 700, then how would I know if I am having a prime or subprime loan before we close the escrow? It looks like the terms of either loan could be the same (5/25, 3/27 ….), am I right?

[HLS]

RAYB, in financial terms, the neg am loan (IMO) is the worst loan ever invented for the average borrower, but the best ever for the lender and salesperson.

You are absolutely correct that it CAN serve a purpose for high net worth, savvy borrowers. As with many things, it’s been abused. Most people don’t know that neg am loans have been around about 25 years, started by World Savings as a portfolio product.

About 5 years ago, the mass rollout started, of offering the largest commission of ANY loan product to the salesperson.
A neg am loan consists of an index PLUS a margin.
The higher the margin you put the borrower into, the higher your commission was. Even a “good neg am” loan was bad.

You may heve qualified for a fixed 6% interest only loan.
The true rate on your “good neg am” was 8%, a 33% premium.
A “bad neg am” could have you at 9%, a 50% premium.
The tradeoff was the option of a low teaser rate.

When you made lowest payment #1, whatever you didn’t pay was added to your loan balance, so you were paying interest on top of deferred interest.

For those that don’t understand how they work, your lowest payment option might have been $1200, with a full interest only payment (at 8%) of $2300… When you only paid $1200, you would add $1100 to your loan balance.

Had you opted for the FULL interest only loan at 6%, your payment would have been $1725 (instead of $1200) and your loan balance wouldn’t grow.
So the cost of NOT paying the extra $525 a month, was $1100,(an extra $575)
Great financial decision?? Only for the lender..

Add insult to injury, they usually come with 3 year prepay penalty, a cash cost of 6 months FULL interest, IF you realize how bad the loan is.

Try and find ONE person of the thousands that have these loans that was given this explanation.

Yes, it “could” serve a purpose, but not to the masses.
My apologies if you already knew this, but at least one person reading will learn something.

The saddest thing is that many salespeople couldn’t explain the above because they truly didn’t understand what they were selling. They only understood the huge commissions, and the borrower didn’t know what to ask, they only saw the lowest payment option.

I once attended a World Savings Neg Am seminar just to watch the presentation. They wondered why I hadn’t ever originated one. The presentation was poor at best, and I didn’t want to embarrass the host. What I enjoyed the most was them saying that they do not like to use NEGATIVE AMORTIZATION, they prefer “Deferred Interest” (sounds better??) I saw glazed looks on faces all over the room, and there weren’t any intelligent questions asked.

The result is that most people have made the largest financial situation of their life guided by an uninformed knucklehead, with a crappy credit score, negative net worth, no mortgage, and very little financial background (if any)

There are still consumers that think they have a 2% loan.
There’s a sucker born every minute, and scammer will find them.

[HLS]

RAYB, in financial terms, the neg am loan (IMO) is the worst loan ever invented for the average borrower, but the best ever for the lender and salesperson.

You are absolutely correct that it CAN serve a purpose for high net worth, savvy borrowers. As with many things, it’s been abused. Most people don’t know that neg am loans have been around about 25 years, started by World Savings as a portfolio product.

About 5 years ago, the mass rollout started, of offering the largest commission of ANY loan product to the salesperson.
A neg am loan consists of an index PLUS a margin.
The higher the margin you put the borrower into, the higher your commission was. Even a “good neg am” loan was bad.

You may heve qualified for a fixed 6% interest only loan.
The true rate on your “good neg am” was 8%, a 33% premium.
A “bad neg am” could have you at 9%, a 50% premium.
The tradeoff was the option of a low teaser rate.

When you made lowest payment #1, whatever you didn’t pay was added to your loan balance, so you were paying interest on top of deferred interest.

For those that don’t understand how they work, your lowest payment option might have been $1200, with a full interest only payment (at 8%) of $2300… When you only paid $1200, you would add $1100 to your loan balance.

Had you opted for the FULL interest only loan at 6%, your payment would have been $1725 (instead of $1200) and your loan balance wouldn’t grow.
So the cost of NOT paying the extra $525 a month, was $1100,(an extra $575)
Great financial decision?? Only for the lender..

Add insult to injury, they usually come with 3 year prepay penalty, a cash cost of 6 months FULL interest, IF you realize how bad the loan is.

Try and find ONE person of the thousands that have these loans that was given this explanation.

Yes, it “could” serve a purpose, but not to the masses.
My apologies if you already knew this, but at least one person reading will learn something.

The saddest thing is that many salespeople couldn’t explain the above because they truly didn’t understand what they were selling. They only understood the huge commissions, and the borrower didn’t know what to ask, they only saw the lowest payment option.

I once attended a World Savings Neg Am seminar just to watch the presentation. They wondered why I hadn’t ever originated one. The presentation was poor at best, and I didn’t want to embarrass the host. What I enjoyed the most was them saying that they do not like to use NEGATIVE AMORTIZATION, they prefer “Deferred Interest” (sounds better??) I saw glazed looks on faces all over the room, and there weren’t any intelligent questions asked.

The result is that most people have made the largest financial situation of their life guided by an uninformed knucklehead, with a crappy credit score, negative net worth, no mortgage, and very little financial background (if any)

There are still consumers that think they have a 2% loan.
There’s a sucker born every minute, and scammer will find them.

[HLS]

DON, Will you have a prepayment penalty ??
That’s the first clue. A loan from a SP lender isn’t necessarily bad.

Loans can be exact same terms from prime or subprime lender. 2/28, 3/27 5/25, 30 YR Fixed. I/O, full am, etc There aren’t really “subprime loans” there are subprime borrowers, and subprime lenders.

Your score alone tells me nothing about what you actually qualify for. Generally, the benefits of a SP are greater at lower LTV’s.
As stated earlier, it is possible to get a better loan from a SP lender, but usually only if you don’t mind the prepay penalty.

If you pay upfront to avoid the PPP, it probably costs the difference to get back to a prime loan anyway, or higher.

If you need another quote, please let me know. I’m in north county.

[HLS]

DON, Will you have a prepayment penalty ??
That’s the first clue. A loan from a SP lender isn’t necessarily bad.

Loans can be exact same terms from prime or subprime lender. 2/28, 3/27 5/25, 30 YR Fixed. I/O, full am, etc There aren’t really “subprime loans” there are subprime borrowers, and subprime lenders.

Your score alone tells me nothing about what you actually qualify for. Generally, the benefits of a SP are greater at lower LTV’s.
As stated earlier, it is possible to get a better loan from a SP lender, but usually only if you don’t mind the prepay penalty.

If you pay upfront to avoid the PPP, it probably costs the difference to get back to a prime loan anyway, or higher.

If you need another quote, please let me know. I’m in north county.

[Raybyrnes]

HLS
Annuities, Car Leases, Neg Am Loans. These types of finanical instraments are not for the average person and I beleive that you are correct in your statement that they are more often than not good for the lending institiution as opposed to the customer. But at the same time if the average Joe started doing some thinking as opposed to asking “what is my monthly payment or what is my rate” and started to ask educated questions than a lot of these poor decisions could have been avoided.

I would like to get you opinion on the CHAFA and ChDAP Loan programs for First time home buyers. For thsoe that qualify it seems like these are good option to start with.

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