The Mortgage Manifesto!

So the story continues…

Lenders have been offering mortgages with an astonishing array of attractions: Adjustable rates, flexible terms, quickie appraisals and no money down, rates as low as 1% - hmmm ;-o

Teasers like these were part of the mortgage boom of the last few years. Lenders - who mostly weren't banks at all, but unregulated brokers funded by Wall Street - raced to write as many mortgages as they possible could. Get it while it is hot, they say.

Those loans were then sold to investment banks, where they were bundled, sliced up and resold to investors around the world.

Mortgage-backed debt securities are now a major global investment vehicle, just like corporate stocks, municipal bonds and commodity futures.

But is this a good thing? Does the worldwide mortgage business end up benefiting ordinary folks and neighborhoods? Or is it just a huge money machine, preying on the ignorant to feed itself? That has been the recent question.

The latest stories do create an impression of mortgage lenders as overly aggressive. But is it all politics or is there another side? I say both!

For instance, Congress last week heard from a

Philadelphia

woman who said she was in danger of losing her home thanks to a refinancing that left her with vastly higher payments than she expected.

But while there may well be many like her, it's probably a mistake to think of all, or even most, sub-prime borrowers as hapless victims.

How can you fight off a possible foreclosure?

Unlike most borrowers in [tag]foreclosure[/tag] trouble believe, the lenders don’t want your house back; even if it has equity!

Homeowners facing mortgage problems and can't keep up with their mortgage payments can often get help from the lender that holds their mortgage. Foreclosure is a losing proposition for the bank, the borrower/homeowner… everyone involved. The lender is eager to and required to get a bad loan off its books in any way possible.

Mortgage Lending and Greed… Just Follow The Money!

Just watching the mortgage meltdown that is unfolding is of little surprise to some of us veterans from the mortgage industry. It has been a train wreck waiting to happen.

The ‘NOISE’ being made all over the media and political arena is well deserved… sad to say. That said, it is important to note that it is probably a small percentage of the mortgage industry that have taken advantage of the process to line their pockets that are causing all this turmoil.

The issues are being fully dissected by the press and of course those grand-standing in politics. It is my belief though that the real problems, not just in sub-prime lending but in lending in general, is not being addressed… and maybe purposely.

The meltdown we are seeing today is focused on the sub-prime arena. That market may be just the beginning. It will spread to other types of mortgage lending including the non-conforming markets where the ‘real creative’ programs exist.

When we look deep into the meltdown problem, as usual, the root of the issue is… GREED. Guidelines for many loans have been loose for sure. For us in the business for years have really been amazed by some of the programs introduced over the past few years.

Unfortunately too, the laws and regulations that monitor mortgage marketing, advertising and disclosure have been ‘turning a blind eye’ to all of the consumer ‘bait and switch’ and the disclosure process that probably 75% of consumers could never begin to understand.

We have all seen and heard the ads… “Rates as low as X”. The laws that require an Annual Percentage Rate (APR), although well meaning, are often ignored and even when applied, not honestly quoted, hardly understood or paid attention to either.

Rates and mortgage markets change daily, hourly and every minute, How can we expect the consumer to ever understand something so complex as the mortgage marketplace when only the most brilliant on Wall Street can even attempt to understand it?

We have all heard the saying “when it sounds too good to be true, it probably is”! It most definitely applies to the business of mortgages and interest rates.

Why doesn’t a whistle go off when the consumer hears the ads like ‘no-closing-costs’ and shouldn’t someone ask, “if I don’t pay them, who does?” It is because we have all been conditioned to look for the free-lunch that doesn’t exist. Does the consumer actually believe that the lender advertising the free closing costs is just feeling extra generous that day and all the serviced providers are as well and everyone is doing it for them for nothing? When does common sense kick in?

I am not trying to say that it is the consumer’s fault. As much as it is their finances and they should be as careful as they possibly can be… the mortgage marketplace and the well-trained sales staffs (some crooked as they come) have done a wonderful job of selling consumers into financial time-bombs.

It is my opinion, that the real crooks in the business start with the mortgage telemarketer illegally selling sub-five percent mortgages and who’s income depends upon selling a mortgage product that puts the consumer’s home at risk. The well-known culprits are the very ones we see in the news with lawsuits and now going out of business as well. That is consumer gouging to the highest and yet even among all this media, it continues.

Stay tuned for more on this subject.

Lending practices draw fire

Home loan lenders, the financial services superstars that helped fuel the nation's housing boom with adjustable-rate financing, no down payments and loans that didn't require a verified income, are stumbling through a hostile new world.

As more of their loans go into default, Wall Street is punishing their stock prices. Federal and state lawmakers are threatening tougher rules to rein in their loosened lending standards. Mortgage companies across the nation and close to home, which shut down suddenly two weeks ago -- are imploding under the weight of risky loans and rising defaults. One of the biggest of them all, Irvine-based New Century Financial Corp., which specialized in risky, or sub prime, loans to borrowers with bad credit history, is in tatters.

On the street even more people who received easy money from mortgage firms are themselves reeling. They're missing payments, being served with notices of default and losing their piece of the American dream.

Today good, functioning communities are suffering because of foreclosures. Following a recent committee hearing rife with horror stories -- about lenders inflating borrowers' incomes, not explaining what they were getting into and committing outright fraud. It's a profound and sudden shift in fortunes for a home loan sector that many now believe flew too high during the boom.

As the recent housing euphoria has morphed into an era of rising foreclosures and overdue mortgage payments, government officials and others are wondering how much responsibility lenders bear for a sudden and worrisome new economic landscape. It's a question with serious reverberations for the future. Borrowers may find it tougher to qualify or refinance, and mortgage firms say that could adversely affect the real estate market. Developers and even sellers of existing homes worry that a reduced number of buyers could significantly curb sales and values. That has real consequences for an economy that has thrived as the housing market boomed.

There is plenty of blame to go around. As home prices soared in recent years, the mortgage industry produced a dazzling array of innovative and riskier ways for borrowers to surmount the affordability problem, in many states across the country. And a new generation of borrowers seemed ever willing to suspend common sense and overlook the fine print -- adjusting interest rates, prepayment penalties, the consequences of minimum payments -- to buy the house of their dreams, no matter how far beyond their means. People know if they agree to these things they'll get the house tomorrow, and that's their only concern.

Now many of those borrowers are getting walloped, and the lending industry is receiving a large share of blame for stoking the fires beyond all reason. On both sides of the lender-borrower divide, people who should have known better didn't say "no." What now? Experts say in coming months there will be more legislative moves to rein in the most aggressive lending practices. That will likely spur orchestrated resistance by sectors of the mortgage industry.

Already 26 states have done so. --Whether Congress will enact a "suitability standard" requiring lenders to be certain a borrower can afford the loan. On the backside of a sensational five-year housing boom, changes are clearly in store. Earlier this month, mortgage giant Freddie Mac said it will no longer buy the riskiest loans that lenders offer unless the borrower can afford its highest-possible interest rate. Many qualify for such loans based on the ability to afford "teaser rates" as low as 2 percent. Mortgage lenders now are beginning to tighten their own lending rules.

Now, borrowers who might have qualified for 100 percent financing are being asked to put money up front and show more detailed proof of their incomes. At a recent state Senate hearing on mortgage industry practices, lenders also blamed "bad actors" in their ranks and argued against systemic overhaul. Indeed, industry leaders claimed so-called "nontraditional" loan products -- offering low initial rate that later reset to higher payments, for example -- have helped millions buy homes they couldn't otherwise afford.

1% Mortgages... No really!

The 1% Mortgages – Are they real?

Mortgage bankers and brokers have been advertising the 1% and 2% mortgages and representing them as if they were fixed. You will see them as Option ARM’s, FlexPay ARM’s, Pick-your-payment ARM’s and other ‘creative’ titles.

It is a very creative loan because in each monthly statement you are given the option to pay  your choice of 4 different payments. You can pay any one of the four, including monthly interest only, a 15 year or a 30 year amortizing payment based upon the fully indexed rate and a 4th and most scary option… a payment that is less than the interest payment that is due. If you choose this fourth option, you are deferring interest and creating what is called negative amortization.

What is negative amortization you ask? Negative amortization is what occurs anytime you pay less that the interest that is due. You are going into the hole! How good or bad is this option?

For a few borrowers (very few in my opinion) should ever choose a negative amortizing type loan program. That said, for some very savvy borrowers, it can be a good tool, if it's used properly. It gives the borrower/homeowner the opportunity to defer part of your interest payment that is currently due, out to the future to pay later.

That said, it is only a good product and financial tool if you plan on and actually pay some of the deferred interest back! If you do not pay the deferred interest...

Mortgage Horror Stories?

Do you have a story to tell? As a means to coach and help clients, I have decided to solicit your mortgage horror stories. Has there been a time when you felt you were taken advantage of in a mortgage loan transaction? Tell me about it. Are you in the middle of a mortgage loan right now? Ask me any questions about the process and I will try and respond every couple of days and help you save some money. So ask away!