It has happened again...Well, let's face it, happens a lot more than I hear. 

I met with a Real Estate Agent I work with, who has a friend that bought a home in the San Francisco Home Loan Market in January, and was concerned because she didn't really know what type of loan she given, and wanted to find out.  The Real Estate Agent was not the agent on the transaction, I know she would have looked out for her client at the loan signing.  The buyer had been told she was getting a 4.5% fixed rate for 5 Years. 

I have heard this before.  I know where this is going unfortunately...So Predictable

I went through the entire loan package with the Real Estate Agent, and we noticed that she was given 100% financing on an Option Arm Mortgage.  For those of you who don't know what an Option Arm is, you can read one of my other blog posts about the Reality of an Option Arm.

Other great Option Arm Blogs:

Ken Stampe Pay Option Arms - Suicide in a Mortgage Loan

Robert Ashby Exotic Loans Being Mistreated...

Tony Gallegos The Option ARM Is Akin To OxyContin  

The basics of this loan is, if you pay the 4.5% start rate, you will add on to the balance every month, and owe more and more over the term of the loan.  Scary!! Especially in this type of market! 

This poor lady, who is relatively new to the country, had no idea about the reality of this loan.  She was told she got a 4.5% rate, and she was comfortable with the payments.  Enough said, she was happy. 

She shouldn't be.  After looking at the actual rates, she was going to defer onto her loan balance $1300 per month!  Not good.  No bueno.  Bad.

She is excited about homeownership...the American dream.  But will this situation continue for her?  Highly unlikely.  She is instantly put in the position to potentially lose her house in the next 5 years.

After crunching the numbers of what I could have done, given her prior excellent credit.  I could have given her a first mortgage at 6.75% (roughly) and 9% on the second.  Looking at the payments, it would have been just $600 more than her horrible Option Arm loan.  Comparing that number to her amount of deferment per month pointed out earlier of $1300 (1300-600), she is losing $700 per month, just in interest! 

The terrible thing about this, is she told the her friend I was talking to she could easily afford the payment she got.  Therefore, wouldn't it make sense to afford (without the ease) a payment $600 more.  After all, she is self-employed, and I am sure she could figure out a way to pay a little more for a much better loan that doesn't give her American Dream away month to month.

Looking further through final Hud, the truth comes out.  The mortgage company had a large credit for closing costs written into the contract, so she wouldn't have to come out of pocket for closing costs.  That makes sense, but the large closing costs, also were combined with a large Yield Spread Premium (rebate) from the bank.  The broker net a $20,000 commission from this deal.  They stuck it to her, in every way possible.  

Bad Loan

High Cost

High Rate

High vulnerability to the market

Have I mentioned a 3 Year Prepayment Penalty yet?  Oh, I haven't, of course there is one.

I couldn't even save her from this horrible loan if I wanted to, because it would cost her $20,000 just to get out of the loan.

Sense frustration?  It is coming out of my pores.

This is the problem with this business.  I am all for people making money in this business.  After all, it is a business.  But the loan to loan mentality is driving the market into the ground.  It won't get any better until some action is taken to educate people about all aspects of Real Estate, ensuring people know that they have to ask questions, and not trust the first person they talk to.

Maybe that first person is a dream contact, but often times they are not.

Ask questions.  Not asking questions can cost you.  A good mortgage broker will offer free advice on your situation and not solicit you for your business.  They will be there to support your concerns.  If you don't ask for it, no one can help.

An honest San Francisco Loan Officer, for your San Francisco Home Loan.