Real Estate Blog - Neg AM Nightmare of the Week (falacious stats correction)

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Neg AM Nightmare of the Week (falacious stats correction)

I know that things in the Puget Sound aren't as zesty as many places, but this loan scenario chaps my hide.

$560k purchase price/ $500k loan amount, in April of 2007...12 month MTA, 3 year Hard Prepay, max margin, 125% neg am cap. Their loan amount is now $525k, other houses in their neighborhood have sold in the last 2 months for $510k.

Yes, the borrowers were unwise/foolish for taking the loan, they were homeless for a week while the LO threw this loan together because they didn't qualify for their 30 year fixed, interest only loan that they were promised. Their condo sold and while living in a motel with 2 kids and 2 dogs, they felt like it was their only option.

Seeing things from a home buyers perspective...living in a motel, possibly losing their $10k earnest money, and at the end of their emotional rope...I can see why they signed.

This is why I never did option arms. This is part of the reason why we are in the housing mess we are in. Yes, borrowers have to claim responsibility, but every Bank that pushed neg am as a financing alternative deserves the billions in write downs and losses in stock options that they are mired in. I have no sympathy for them...only contempt!

2005--70% of borrowers making minimum payments on option arms (WSJ, 12/1/05)

2007 (through 2Q)--80% of borrowers making minimum payments (UBS)

2007--91% of CW's option ARMS were limited doc (numerous sources)

2nd have 2007 and 1Q estimates, no hard data, up to 90% of borrowers making mimium payments--survey reliant.

**my apologies for not having my glasses and reading the data carefully enough. I posted in a comment that 90-95% of borrowers were making the minimum payments.

Posted by Rich Sweum on 05/27/2008 07:24 PM

Comments (13)

Post is included in group: Mortgages
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13 Comments on Neg AM Nightmare of the Week (falacious stats correction)

MAY

2008

Rich: I agree with you. It's funny that co-workers in my office still talk about how they did these loans. Here's the thing; not one of them fully understood the terms of the loan. All they understood was the $10,000 in fees they made on the loan. The only good news is you reap what you sow. These LO's that sold these things are either done or on the verge. Unfortunately the borrower is up crap creek. I've told many just to hang on if they can-the market will come back. Take care.

Paul

Hi Paul, I too know of LO's that would "ring the bell" when they would slam an option ARM with $15,000 in gross commissions on a client. There are just as many scheisters with MBA's that did them, but what really scared me were the non-high school graduates that were sluffing these loans on people that had no business being close to a loan like this. Many of them were pawns of their unscrupulous broker.

The lastest craze in addition to the "$3500 pay your loan off early software/MLM scheme" is the "Loan officer come insurance salesman gig." There are those (very few) that are doing it right and really understand the concepts, and then there are those that understand only "one thing"...a big juicy commission on the most expensive type of life insurance policy.

I would like to see Loan Originators have to pass a series of tests like financial planners...a high enough bar to keep idiots out of the business. While it wouldn't eliminate fraud, it would go far towards eliminating a significant segment of the schmucks.

MAY

2008

Did the borrowers HAVE to choose the deferred interest option? I know plenty of people who managed their finances, with a negative amortization ARM very well.

Hi Brian,

"Have to choose" is relative. You're living in a hotel with two kids and two dogs, because the schmuck mortgage broker failed to deliver on a financing package that would have been manageable, a 30 year fixed interest only. Your dream house is slipping away, along with earnest money and sanity. You are not an industry insider and don't fully "get" the probability that you are on the front end of a housing price decline and you definitely don't get the complexities of a neg am loan. In that situation, you take what you can get, especially if it's the only life-ring presented.

You know many who are handling neg am well? Bully for you! Statistics from the Mortgage Banker' Association, Credit Suisse, et all confirm that 90-95% of people with neg am loans have been making the minimum payment. While there are neg am success stories, their numbers don't legitimize the vast majority of people who are not being helped by them.

Many brokers need to practice "self delusion" to sleep at night, I wonder how well they would sleep if they were personally liable for the loans the wrote?

Such a sad story but it was all too common back in the day. Good thing a lot of the strong lenders now are no providing those loans anymore.

MAY

2008

Statistics from the Mortgage Banker' Association, Credit Suisse, et all confirm that 90-95% of people with neg am loans have been making the minimum payment. While there are neg am success stories, their numbers don't legitimize the vast majority of people who are not being helped by them.

Fallacious argument, Rich. Prove your statement.

So would I. Then we'd never hear this incorrect and absolute statement:

This is why I never did option arms. This is part of the reason why we are in the housing mess we are in.

Guns don't kill people; people kill people. Loan programs don't cause foreclosure; the incorrect application of the loan program causes foreclosure. It's "fashionable" to say you "never" wrote neg-am loans but it refutes your "financial professional" statement. True financial planners understand how and when loans are properly applied.

Many brokers need to practice "self delusion" to sleep at night, I wonder how well they would sleep if they were personally liable for the loans the wrote?

I know what you mean. I wonder how horrible those originators feel that slammed their customers into 30 year fixed rate loans, that sucked up the families budget, so that they couldn't save any money to provide liquidity, so that they could get through a rough patch. (an absolute statement used to illustrate why absolute statements are silly)

Ya see where I'm going here? Financial planning professionals don't make absolute statements; we analyze and make prudent recommendations.

JUN

2008

Brian, I'm glad for you...keep drinking the kool-aid. The venerability of neg am loans must be determined, in the end, by assessing the proportion of borrowers that have benefitted by having a option arm verses those who have been damaged. Even if 25% of borrowers benefitted, the 75% of borrowers who have not been served well is an indictment against the availability of these loans. Perhaps if they had some stop-gaps built in to the qualification process such as those in place for reverse mortgages, fewer people would have been damaged.

JUN

2008

Options ARMS have there place in the market, just like fixed period ARMS, Interest Only and fixed rate programs. The key is to help the customer determine the best product for their needs. Find out the customers needs by asking questions, then explain to them which programs will help them achieve their financial goals. When it came to an Option ARM, I always took extra time to explain the details to my customers. If I felt that they might not understand it, I would encouraged them to consider other financing options. The most obvious statement to me that indicated they did not understand the product was when they said they were getting a 1% interest rate and that they didn't think I could beat that.

I've never been in a situation where I have recommended a loan product based on how much I can make in commissions. I have always taken the high road to help my customers evaluate their needs, review their options and then recommended the product that best suited their needs. I like to think that the best loan officers in the market place act as consultants for their clients and recommend products that will help their clients over time.

Hi Doug, after having received a number of scathing emails from "responsible option ARM dealers" (I like the sound of that...ARM dealers) I'm ready to say, "Sorry!" I've been advocating throwing the baby out with the bathwater in regards to neg am! But please realize, the size of the bath tub is like an olympic size swimming pool! There is a lot of "dirty water" to throw out.

Just to be clear, I've never recommended an Option ARM and would find it hard to ever do so. Some very smart Real Estate people have trouble understanding the product. The only time I ever originated the product was in response to a customer who was interested in the product. If, after advising them of the pros and mostly cons of the product, they still wanted the product, I would help them. More often than not, they changed products when they found out that the actual interest rate they pay, changes on a monthly basis.

I am not a supporter of the Option ARM product. I am a supporter of having various products so that customers have a variety of tools to help manage their finances.

JUN

2008

I agree with Rich that more intensive barriers to entering the mortgage market would probably benefit consumers quite a bit.

I also agree with Brian that guns don't kill people and loan programs don't screw the market. I only wish that there had been better understanding all around as to how these loans work. They really can be a great tool, but probably better used by a savvy investor who knows what he's getting into.

Btw, Brian, I also loved your tip of the hat to philosophy and logic - Aristotle would be proud!

JUN

2008

I did sell a few - ONLY when the client fully understood the ramifications. Then I was sure he/she had the $ to pay fully the amortizing amount every 3 months - month one - min. payment, month two - interest only, month three - fully amortizing...these people are still above water...

Hi Joan, "uncle"...I fully concede that there are a number of mortgage professionals who offered these loans responsibly. Anecdotally, I know far more LO's who were completely irresponsible in the manner they sold them and irresponsible in regards to who they sold them to.

Here is one of my favorite imperfect comparisons: Option arms are like Oxycontin...when presribed by professionals to people that can actually benefit from them and not end up being destroyed by them, they can be a useful tool.

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