Mortgage Loans: Know What You are Signing.

by David Reed


I got an email from a lady that retired last year. She bought the condo she's living in with a Payment Option ARM. Trouble was, she really didn't know it was "one of those" loans. And she's been around the block a few times and had purchased at least four other properties throughout her adult life. But now the loan balance had reached 115 percent of her original loan due to negative amortization and her new house payment was higher than her monthly income.

Her debt ratio was something like 135. That means her house payments including taxes and HOA fees were 135 percent of her gross monthly income. Gross monthly income, as in before withholdings. Her savings were dwindling fast.

She asked if there were anything she could do to get the payments back down to where she could afford them and unfortunately I told her that there wasn't anything she could do -- unless she could show that she never signed an "Adjustable Note Rider" or "Payment Option ARM Disclosure" or claimed outright fraud by the mortgage broker.

She couldn't recall signing anything so I told her to go back and look again because a lender won't draw closing papers on one of those loans without that signed document in the file. The next day she called and said, "Yes, I signed one."

She just thought she was getting a great deal on an interest rate and could pay back the principal anytime she wanted. Was she swindled? Maybe. It's also likely the loan officer didn't know what in the world he was talking about only that the monthly payments were so much lower than a fully amortized one. Who can resist that?

It's easy to sell monthly payments. Much harder to explain to a consumer how a contract rate can negatively amortize a mortgage loan leading to a fully indexed payment becoming due upon the 13th month of loan inception if the unpaid principal balance exceeds 115 percent of the original note.

Did you hear that? I said it was much harder to explain to a consumer how a contract rate can negatively amortize a mortgage loan leading to a fully indexed payment becoming due upon the 13th month since loan inception if the unpaid principal balance exceeds 115 percent of the original note.

Okay, now hold the phone.

How many times a day do you hear a radio commercial or see a TV. ad or an online pop-up say, "Cut your monthly payments in half! Call Now!"

Do they say how? No. They explain that, with scripted voices on the other end, how easy it is to qualify and "wouldn't you like to have some extra cash in your pocket Mrs. Consumer" or some other salesman-like tripe.

And just who are these lenders? They're national lenders. They're mortgage bankers. And they push those loans 24/7.

Okay, now go back to the phone.

Why can't loan disclosures be just as simple as, "Cut your monthly payments in half!?"

Why can't loan disclosures say, "You can pay this much every month, but if you don't pay this much every month it gets added back to your loan. If your loan goes to this much then your new payments will be this much. If you can't make those payments we can foreclose on you."

Do you hear that anywhere? No. You read disclosures that will put speed-freak to sleep. I know lenders are trying to cover themselves and those disclosures are written by a bunch of lawyers but really, who understands all of those? Especially since you're signing, what, a hundred pieces of paper at closing?

I say if you're a lender and you're going to have such a complicated loan offering that even the loan officers pushing those loans can't explain them, then something's wrong. Put it in plain English or don't push the product.

And by the way -- that same lender on the radio who wants you to take a payment option arm to cut your payments in half also runs another ad telling you what an idiot you are if you have an adjustable rate mortgage so it's time to get a fixed rate.

I guess that's after you take their idiotic payment option arm.

Sheesh!

Trb,

Check fair lending act by the Feds.

will

Federal Fair Lending Regulations and Statutes

Fair Housing Act
The Fair Housing Act (FHAct), which is title VIII of the Civil Rights Act of 1968, as amended (42 USC 3601 et seq.), makes it unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion, national origin, sex, handicap, or familial status. Anyone who is in the business of providing housing-related loans is subject to the FHAct (as well as the Equal Credit Opportunity Act).
Key Provisions of the Fair Housing Act
The Fair Housing Act specifically applies to the financing of a loan secured by residential real estate. As noted in section 805 of the act, a bank may not deny a loan or other financial assistance for the purpose of purchasing, constructing, improving,
repairing, or maintaining a dwelling because of the race, color, religion, national origin, handicap, familial status, or sex of the
•
Loan applicant
•
Any person associated with the loan applicant
•
Any current or prospective owner of the dwelling
•
Any lessees
•
Any tenants or occupants
The FHAct also makes it unlawful for a creditor to use a prohibited basis to discriminate in fixing the amount, interest rates, duration, or other terms of the credit. In addition, because residential real estate−related transactions include any transactions
secured by residential real estate, the act’s prohibitions (and regulatory requirements in certain areas, such as advertising) apply to home equity lines of credit as well as to home purchase loans. These prohibitions also apply to the selling, renting, brokering, or appraising of residential real property and to secondary-mortgage-market activities. Consequently,
a bank’s practices in the area of housing lending should be examined in a general way to ensure that they do not ‘‘otherwise make unavailable
or deny’’ housing, even when no specific act or practice may violate any specifically named prohibition of the FHAct.
Unlawfully Discriminatory Lending Practices under the FHAct
Like the other civil rights statues, the Fair Housing Act was broadly written by Congress. A variety of lending practices have been found to be illegal under the act, including some that are not specifically
mentioned in the act but that have been determined to be illegal because they violate requirements and prohibitions that are implicit in the act’s language. Some of the practices that the courts have determined to be prohibited are described below.
Redlining
Redlining is the practice of denying a creditworthy applicant a loan for housing in a certain neighborhood
even though the applicant may otherwise be eligible for the loan. The term refers to the presumed practice of mortgage lenders of drawing red lines around portions of a map to indicate areas or neighborhoods in which they do not want to make loans.
Redlining on a racial basis has been held by the courts to be an illegal practice. It is unlawful under the FHAct only when done on a prohibited basis. Redlining an area on the basis of such considerations
as the fact that the area lies on a fault line or a flood plain is not prohibited.
The prohibition against redlining does not mean that a lending institution is expected to approve all housing loan applications or to make all loans on identical terms. Denying loans or granting loans on more-stringent terms and conditions, however, must be justified on the basis of economic factors and without regard to the race, color, religion, national origin, sex, or marital status of the prospective borrowers or the residents of the neighborhood in which the property is located. For example, a bank may consider such economic factors as
•
An applicant’s income or credit history
•
The condition, use, or design of the proposed security property (or of those nearby properties that clearly affect the value of the proposed security property), provided that such determinants
are strictly economic or physical in nature
•
The availability of neighborhood amenities or city services
•
The need of the lender to hold a balanced real estate loan portfolio, with a reasonable distribution
of loans among various neighborhoods, types of property, and loan amounts
Each of the factors must be applied without regard to any of the prohibited bases. Consumer Compliance Handbook FHAct • 1 (1/06)

I thank you for posting FHA's outlined guidelines. I am familiar with FHA / HUD / FDIC / ITIN / Fannie Mae / Freddie Mac / CalHFA / VA / DAP / ChaDAP / et al guidelines. However, I find it amazing how some "RE Lenders / Brokers" find the way to walk around the guidelines, hoping to never get caught.

Once again Will, thank you for your comments and your supporting post.

Trb

Coming to the US I remember handling a mortgage and surprised the mortgage broker that I actually wanted time to read the details and legalese of all documents signed. He told me thats never done, that I should trust him and thats all standard and that I can not change it if I want the loan etc. He learned the hard way thats not how to deal with me but I guess I was the only one in his business who read the text and decided to kick him out of the door.

It may be the lawyer in me or an untrusting character but I grew up learning to read and understand before I sign. (I remember my first health insurance where I asked the insurance agent why in gods name should I have one when everything which can come up at some higher cost is excluded in the fine print and he had no answer because he hadn't even read the fine print himself).

 

The law is one thing but there are plenty of loopholes and some brokers just sell the mortgage counting their income before they even funded the mortgage. In addition in an environment where such behaviour is condoned and not seen as a bad trait, who is there to complain, sure when the baby is thrown out with the washing water (I know should not try to translate foreign sayings into english, especially when its my number 4 language) everybody is more knowledgable but ..............

 

The point is whatever the law says people never learn, come the same situation they do the same.

Richard,

There is a huge difference between a "mortgage broker" and a "bank's home mortgage consultant".

"Brokers" work for a brokerage house and try to make as much money as they can (origination point could be as high as 2.5% and then, they try to make an additional two points in the back). A "bank's home mortgage consultant" or "Relationships Managers" as they are known in some banks) have a strict "ethics code" to adhere. For example, our bank will not allow ANY Home Mortgage Consultant, to charge more than 1.5% for any loan. In most cases, the most they charge, to remain competitive against other banks, is half a point for the transaction.

Now, as far as "reading the contract" is concerned. For home buyers, we have a condition. The buyer(s) must attend a "Home Buyer's workshop and receive a certification of attendance and completion. We highly encourage our clients to read the fine print. We do not want any surprises nor dissatisfied clients that may end up taking their business somewhere else, when the time comes to refinance or to purchase another property, as their new home or their investment.

And, you are one hundred percent correct. Banks are in the business of making money. After all, aren't we the ones that take most of the risk?

Respectfully yours,

Trb

PS: I am multilingual too. Two of my children reside in Hamburg.
Mein Deutsch ist schrecklich.

That workshop approach is new to me, good idea if it addresses the people in a way that they understand.

With your kids in Hamburg I hope your German improves, Hamburg is a very nice city, lived there directly at the lake with direct water access and still miss it.(going sailing on the lake with my son is something he still remembers, especially when we got turned over by a high wind )

 

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