This was written for my Pod-cast at The Real Estate Sage the individual link is http://realestatesage.info/2008/04/02/httpwwwgetthemoneyus.aspx
The Evil Of Ignorance / Is The Pre-payment Penalty Evil?
During the current mortgage crisis every news pundent, every former home owner, every politico, every fool with little or no lending or banking knowledge has pontificated an opinion as to the reason for proliferation of foreclosures! We have been forced fed a virtual cornucopia of unsupported illogical sound bytes all of which are both individually and collectively pro-ported to be the cause of the problem.
With no research and only selective anecdotal testimony cures are being proposed and implemented with all of the though and effectiveness of the "snake Oil" from the mid 1800's! To make matters worse three related but dissimilar problems are being treated as one ailment! With the same attitude as the doctor who says "take two aspirin and call me in the morning" The President and Congress both wanting to be seen as doing something are proposing massive changes. Like the aspirin, hiding the real symptoms until the problem, hopefully can cure it self.
The mismanagement of major financial institutions has little or nothing to do with fraud and scheming at the interment level, and nothing what so ever to do with deception and fraud at the loan origination point. Indeed the symptom "prolific foreclosures" yes "prolific!" Never in the known history of mankind has it been acceptable, even a badge of honor to default on your debts and specifically to default on your home. Until recently those blessed few who could own their own homes would sacrifice every thing often including their first born to protect their home, and many a first born has sacrificed to protect the family home. Between changing fortunes and seeking an easy out, how many of the current foreclosures have anything to do with the systemic lending problems?
One of the inane excuses used to justify defaulting, to blame the lenders for personal failures is the use of "pre-payment penalties." The little understood pre-payment penalties are simply a tool used by lenders to lower the borrower's closing cost, just like the much maligned yield spread premium. Both these lending tools reduce the borrower's cost, the buyer normally has a choice weather to accept or reject these tools, assuming that the borrower has and is willing to spend sufficient cash to close the loan!
These two powerful tools allow borrowers to pay less at the closing table, they do added to the lenders gross profits, not as so many think by allowing them to charge more but by allowing many more consumers to buy more. When pre-payment penalties are included in a loan or the lender pays the broker YSP it doesn't raise the value of their service it simply lowers the amount they would other wise have to charge the applecart at the closing table.
When the borrower tells the lender they will keep a loan 1, 2, 3, 4, or 5 years to induce them to lend money at a lower rate the lenders often included a pre-payment penalty in order to maintain their profit leveal if the borrower should pay off early! It's that simple the pre-payment penalty simply secures the borrower's promise to the lender. Pre-payment penalties don't cause foreclosures defaulting borrowers cause foreclosures!
To ban pre-payment penalties, is simply to denies future borrowers of a useful tool to reduce their cost.
Those that will argue that debtors could have refinanced or sold except for the pre-payment penalties are out of line. The truth is that the borrowers don't want to keep their word to the lender! They don't want to live up to the obligation they agreed to! The truth is that pre-payment penalties are often the easiest money to get forgiven in a short sale. The fact is many pre-payment penalties are what is called "soft" meaning that it can be waived if the property is sold. The fact is that pre-payment penalties are not so large that they should prohibit serious cost saving refinance.
The fact is that almost all pre-payment penalties call for 6 months interest on 80% of the reaming principal balance.
The truth is there is very little truth in the media and politics regarding the current mortgage and foreclosure crisis!
Bill
William J Archambault Jr
The Real Estate Investment Institute
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