Over the past six plus years I have seen and heard a lot of different mortgage advertisements and it's no wonder that according to a Harris Interactive poll upwards of 67% of Americans feel mortgage ads are only slightly credible or not credible at all.
I have heard the ad for the 1.25% 30 fixed rate mortgage. Well what do you think the consumer hears? They hear 30 YEAR fixed rate when in fact this rate is fixed for 30, 30 days that is. Then it adjusts monthly based on an index and a margin somewhere between 2.2% and 4.5% so their fully indexed rate in today's market is usually between 7.5% and 9%.
Some deal for the consumer that thinks they have a 1.25% mortgage on a $300,000 mortgage with a $999.76 payment when in fact the interest is accruing at $1,937.50 (assuming fully indexed 7.75% rate) so they are actually adding $937.74 to their mortgage balance each and every month.
Here's one that is playing in my local market. Our ARM bailout program allows you to lock in a 30 year fixed rate at 5.375%. Then it goes on about the ongoing ARM adjustment threats and at the very end of the ad very quickly and in a lower tone of voice it says APR is 6.617%. Well on a $200,000 loan you need to fork out $24,950 in fees (prepaid finance charges) to get a $159.62 lower payment so their break even point is 160 months (13 years 4 months), if it was a purchase in a 33% tax bracket then the break even point is 105 months (8 years 9 months). Certainly a great deal considering 99% of all mortgages are paid off in 12 years and 90% of all mortgages are paid off in 7 years.
There's an internet ad saying rates as low as 5.375%, you have to click through several pages to find out that this is a 6 month ARM that can go up 1% every 6 months with a lifetime cap of 6% and the fully indexed rate was around 7.875% AND it cost 2.5 points- on a $250,000 loan that is $6,250 to get a mediocre rate on a 6 month arm. I have a 1 month arm that has a fully indexed rate of 6.875% and it didn't cost me a point.
The Federal Trade Commission conducted a study that showed 9 out of 10 borrowers do NOT understand the charges and costs involved with their loans.
Since I know many of you that will read this I am by no means defending the mortgage industry or saying that the mortgage industry doesn't need to change because it does. What I am saying that "YOU" the Real Estate Agent needs to step up to the plate and help make sure your client doesn't get into bad loans and that they FULLY understand the loans they are getting. You are after all their real estate expert.
In my opinion if you don't then you may pay a hefty price. See Congress, the media, and the NAR are already talking about "suitability" standards that will have to be met for home buyers and home sellers. So in the very near future you could be liable for not making sure the loan and more importantly the loan structure your client gets into is prudent for their needs and desires.
The mortgage provider will have similar suitability standards, but if I was in your position I would want to make sure my clients were getting into the right loans. If you don't then even if Congress, the media, the NAR, NAMB and MBA don't get a suitability standard passed then CIVIL ATTORNEYS WILL.
They already go after financial institutions for bad investments so wouldn't it make sense that if the type of loan and loan structure a client got into cost them their house, their credit and caused severe mental anguish AND there was a better loan or something you could have done to protect the client that they could come after you and the lender?
The sad thing is I know that in my area the agents haven't shown any concern to learn these things. We have been marketing to more than 3,600 real estate agents to attend a FREE informative workshop "How to Identify Predatory Loans and the New Real Estate Agent Fiduciary Responsibility", and we have 3 agents that have given us their RSVP.
The agents that have attended the workshop expressed that the info we shared was ground breaking and that they needed to fully understand it to be successful and protect their clients and their practices in the future. They agreed that once Civil Attorneys get their hands around these concepts then it will get ugly fast for the real estate and mortgage industries. Maybe I'll offer this workshop to Civil Attorneys.
Until next time,
Kurt
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