Taking aim at mortgage offers that conceal risky terms
Can You Believe This?
Yesterday Reuters ran an article with the headline “Web Lenders Woo Subprime Borrowers Despite Crisis.” It starts,
“Get a “$200,000 mortgage for $667 a month!” a banner advertisement on a lending Web site proclaims. “Bad credit OK!”
The mortgage loan advertised is a negatively amortizing ARM with an initial rate of 1.25%, fixed for only 30 days. According to the article, the rate then adjusts to MTA plus 3.25%, giving it an actual current rate of 8.28%. Crunching the numbers, one can see that if the borrower were to continue to make the $667 minimum payment advertised, the loan balance would grow $708 per month in the first year, assuming the MTA index remains flat.
I am glad to see the mainstream media calling out this type of advertising. It seems irresponsible in our current market to advertise negatively amortizing loans, particularly to those with bad credit. While loans like these may fit a specific purpose for the sophisticated buyer, they certainly should not be used to low-ball a payment to get a client in the door. The abuse of these loans has contributed to the problems our industry is facing today.
Now more than ever, you should be encouraging your clients to work with a professional lender you trust. The lender should be providing a mortgage strategy to help your clients achieve their long and short-term financial objectives. For most people, a mortgage loan is the largest debt they will ever have. It deserves to be managed as such. If you do not know where to start, follow this link for a list of questions you can use to screen a potential lender.
Excellent article. It behooves agents to choose a professional lender not only for their client’s sake but also for their own commission’s sake.
Just say no to slimey lenders!
I also like how the block quote of the lender ad is right next to the picture defining risk. Perhaps the lenders should be required to follow suit and post the risk photo next to all their ads.
April 24th, 2007 at 1:28 pmAndrea – thanks for the comment. I agree, the risk picture is extremely appropriate. If home owners understood how their loans worked, there would be far fewer foreclosures and short sales. Complicated loan programs are not the problem, rather the loan originators that place people in those loans purely for the fat commissions without regard to their financial goals. There is nothing wrong with earning a fair commission – provided the client is in a better place because of the work you did for them.
April 24th, 2007 at 4:06 pmAndy,
Thanks for another great contribution.
I get really tired of hearing from clients: “but the ad on the internet says I can get a $300,000 mortgage for under a thousand dollars…”
April 24th, 2007 at 5:56 pmAndy, another great article by you. I especially liked the question sheet you linked to. It something that I will be giving out to buyers that might fall into the difficult to find lenders category.
April 27th, 2007 at 9:35 amHopefully, it save them future aggrevation and disappointment.
Glenn, I appreciate the feedback on the question sheet. So often we encounter clients in a great deal of stress because the lender they chose is not delivering on the commitments that were made up front. We have tried to make it easier for clients who do choose to shop lenders to do so armed with information to help them choose wisely. Anyone can quote a low rate, but that is certainly not the solution for most people. The lowest rate on the wrong loan program is far more costly over time than a competitive rate on a program that meets their financial objectives.
April 30th, 2007 at 2:46 pmAndy if the public would realize that the “rate” isn’t everything they would be SO much better off.
May 2nd, 2007 at 1:07 amThanks Ken, I agree. Our industry has done a great job of ‘commoditizing’ ourselves. We have constantly advertised rate, therefore training the public that rate should be the primary concern. You don’t see Morgan Stanley or Merrill Lynch advertising their fees and commission schedules in the paper each week, yet there are mortgage lenders out there whose primary source of business is due to the low rate they advertise. What is worse is that I would bet virtually none of these can actually deliver on the rates they advertise. I wonder why people have very low expectations of their mortgage lending experience?
May 2nd, 2007 at 9:41 amAndy that is a very enlightening post!
I was working with a couple a few months back who informed me of their fantastic rate on a loan which seemed a little too good to be true. I asked them to double check with the lender and find out how they were able to acquire such a low rate. (I also gave them my personal lender’s number and suggested they call him for a second opinion.) They never told me what happened, but I imagine they read the fine print and that’s why they switched to the lender I use.
It just seems to me that the saying, “if it’s too good to be true, it probably is” sure seems to apply to some of these advertisements either online or in print.
May 4th, 2007 at 9:11 am“Andy if the public would realize that the “rate” isn’t everything they would be SO much better off.” -Ken
Very true Ken. The fine print can be a killer for those “cheap” loans, especially those origination fees. If it sounds to good to be true….
May 7th, 2007 at 7:34 pmI just talked with a buyer that paid what amounted to almost 4 points for a loan. The rate was ok at best and the buyer had a 700 credit score. Amazing how bad some loan officers will rape a client. Guess it’s to bad the person purchased from the listing agent without representation and didn’t have anyone looking out for their interests, know I wouldn’t have allowed that to happen to one of my clients.
May 27th, 2007 at 12:44 amKen –
Thanks for sharing that with us. There seems to be a false belief among some people who shop online for loans or choose to buy or sell without representation that they are getting a great deal. More often than not, when I have done loans for buyers who buy without using a Realtor, they are paying too much for the home. I think they have the PERCEPTION they are saving money because there is no Realtor involved, but in actuality they lack the market expertise to set the price or become emotionally involved with the home and don’t have the Realtor to give an objective opinion. One may say this bodes well for the seller who is selling the home for more than it is worth, until the sale falls apart at closing becuase the property did not appraise for the sale price. Rarely do I see deals with no agents involved close smothly.
May 29th, 2007 at 7:57 amA credit score of 700 and they PAID 4 points???!!!!! You are not kidding, they got the shaft. With their credit, they should paid 1 point if even that. I wonder how many points Redfin sticks to their clients.
May 29th, 2007 at 11:48 am4 points on the loan! I wonder why the lender did not say something about the points. I thought some lenders cap the points and out of closing commission to about 3%.
Being in Florida, I have found many buyers from out of the area think nothing about paying points on a loan, even though most loans done by local lenders or mortgage brokers do not have any points associated with them.
In addition, I wonder if any of these buyers actually think about the effective interest rate of loan, if they are not planning on holding onto the property for life of the mortgage?
Ken – the buyer in your situation could he have been an investor buying investment property?
June 5th, 2007 at 5:16 am