Archive for the 'Neg Am Loans' Category
Minnesota Overreacts to Mortgage Abuse
In one of the biggest overreactions to mortgage lending problems, the State of Minnesota has passed legislation outlawing stated income mortgages. On April 20, the state legislature passed House File 1004 and Senate File 988 aimed at limiting abusive home lending practices. But did they go too far?
Oops, I Think the Baby Was in That Bucket
Requiring that borrowers must now document income and assets for all loans on primary residences and 2nd homes, the law prohibits the use of any Stated Income, No Ratio, No Doc, & No Income/No Asset loan. In other words, the only way a borrower can get a loan after August 1st is to show pay stubs, W-2�s, tax returns, and bank statements.
This would make it impossible for many self-employed people, not to mention those with income from unseasoned second jobs, notes or child support/alimony lasting less than three years, to secure a home loan. See my previous post on 4 Reasons to Keep the Wage Earner State Income Loan for a better understanding of this issue. Dumb idea? Yes, I think so.
And That Ain�t All
Minnesota�s bill also bans all negative amortization loans as well as prepayment penalties on loans of less than $75,000. It establishes an agency relationship for mortgage brokers with civil and criminal penalties to go along with it. Now, we can discuss the merits of suitability standards and penalties, but before you decide whether this legislation actually protects consumers or just covers legislators� asses, read this:
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There is a famous story about legendary Bluesman Robert Johnson. It is said that while travelling up and down the Mississippi Delta, he met the Devil at a crossroads and sold his soul in exchange for musical genius. Taking an Option ARM—a neg am loan by its former name—is like selling your soul for a low mortgage payment. But what happens when it’s time to pay up?
The Good
Don’t get me wrong. In the right circumstances—a client with fluctuating income or a business owner with unpredictable cash flow—a neg am loan is a great tool. As a former financial planner, I like neg am loans for their ability to better manage cash flow and income taxes. Read my article in the Creating Affordable Payments series. But only one person in 50 has a valid reason to use one. For everyone else,…
Okay, in our effort to create affordable payments, we laid a foundation with the 15 and 30 year fixed rate loans in Part I. We stretched the repayment term out to 40 and 50 year loans in Part II, and then looked at shorter term intermediate arms—the 3/1, 5/1 and 7/1–-in Part III. In Part IV, we looked at interest-only loans that eliminate the principal portion of payments entirely.
Now, let’s pull the cover off the Pay Option ARM and see what lies beneath. Is this controversial creation a useful tool or a dangerous weapon? Will it solve a unique challenge or insinuate itself into your life like a Trojan Horse only to destroy your dream of home ownership from within? Opinions on Pay Option ARMs tend to come in black and white. But nothing in life is that simple, is it?
To begin, let’s get something clear. There is no such thing as a 1% mortgage. That should go without saying. But I am continually amazed at all the smart people who believe in ghosts. We’re all guilty of wishful thinking, but if you really believe you could get a 1% rate when all your friends were getting 6%, then perhaps you deserve a surprise. As my financial planner says about foolish investing, money tends to be returned to its rightful owner.
A Rising Tide Lifts All Boats
That was certainly true of the appreciation that carried real estate values high up the beach in the first half of this decade. However, the tide has since rolled out, exposing the rocks and broken glass on the beach and leaving many a boat on its side in the sand. This is the story of one such wreck.
A real estate agent with whom I do business called a few weeks back. She had a friend in financial trouble and wanted to bring her in for advice on her loan. The friend had refinance in 2005 into a loan that she thought was fixed but later discovered it wasn’t. She was not sure what to do.
If anything makes me spit nails these days, it’s the way lenders are pushing “Pay Option” Arms. Back in the day, if you uttered the words “negative amortization”, people would leap up and run the other way. Everybody knew somebody with a horror story to tell. So we shelved these loans for a few years, gave them a face lift, and hauled them out to help folks buy homes they can’t afford.
My wholesalers tell me stories of new mortgage shops full of inexperienced telemarketers hyping these loans. My title company reps talk of 22 and 23 year olds bragging about the fees they’ve earned duping little old ladies. And befuddled clients file through my office each week trying to figure out this weird loan their daughter’s boyfriend put them in All too frequently, I have the unpleasant task of telling them that there’s not much they can do. You see, aside from creating artificially low payments that can jump suddenly, these loans carry stiff prepayment penalties that make them difficult to escape. And all the while, your loan balance is growing. Think of it as a Trojan horse.