I talked to a lady this last week who is a classic example of what’s been happening…..
by Tom on February 16, 2008
in Uncategorized
Without getting into any details that would be confidential information, she and her husband bought their current home in a suburb near where I live. They bought a “moderately priced” home for the area (actually under $200,000) and went to the same mortgage broker they had used for their first home. Well, on this home, they did an 80/20 (2 mortgages, 80% on the first, 20% on the second).
The mortgage broker sold the second to the bank I work for, and sold the first to World Savings (now owned by Wachovia). The second was a relatively normal equity line of credit (more thoughts on that in a few minutes). The first was an option ARM.
Jump three years down the road, and what has happened?
1. The rate on the option ARM has jumped from 3% to 8.5%.
2. Because of the increase in rates, they have had to make the “minimum payment” at times and the balance on their mortgage has gone up.
3. They want to refinance to get out of that loan, but they can’t because property values have fallen and they are upside on the loan.
So I ask you, who do you think benefited from them getting into that loan program?
Let’s consider some possibilities:
1. They did because it’s a cheaper option than a 30 year fixed rate? Nope that doesn’t really work. It might have been cheaper for 3 to 6 months, but it’s not any more. They have lost over $5000 in equity because they took out this loan. Plus 3 years ago, 30 year fixed rates were in the mid to upper 5%’s, so, paying 8.5% now is definitely costing them more money. So, they are definitely not the ones who benefitted from them getting into that loan program.
2. Their Realtor? It better not have been him because that would be illegal. Realtors aren’t supposed to get kickbacks from mortgage brokers.
3. Their mortgage broker? Ding Ding Ding! We have a winner. I’ll bet you that the broker made 2 to 3 times as much writing them the option arm than he would have if they went with a boring conventional 30 year fixed.
So, there we have it. We have a customer who is in trouble on their mortgage because the rate has gone way up and the only logical benefactor for them getting that type of loan is the mortgage broker.
Until we get a better handle on making sure that mortgage people (I was going to say professionals but that doesn’t apply to all people in the business) start putting the needs of their clients in front of their desire to make more, we are going to see continued problems like this.
As to this customer, I told her that the only way I could see for them to get out the loan they have is to go back to Wachovia and beg for them to modify the loan into a fixed rate. No one else will be able to refinance them because they owe more than what the house is worth.
Oh, that brings up another question – my bank has a second on their house that is partially unsecured now because it’s over 100% of the value of their house. What is the likelihood that we would have done that second mortgage if we had known they were getting an option arm for the first? Brings back the old “wholesale vs. retail” debate doesn’t it?
Happy Saturday!
Tom
