The Mortgage Du Jour of the last Few Years Slams the Stock Market!

Mortgage and Lending with Homebridge Financial Services NMLS 210215

Don't be fooled - Despite their CEO's insistence that it's the housing market that caused his companies 33% drop in earnings and the stock market's subsequent 200 point tumble on the news, most experts believe it's the make up of the portfolio of the largest mortgage banker that is the real ticking time bomb(I can't tell you who the lender is, but their name start's with C and ends in wide).  Their CEO has sold over $300,000,000, yes that 300 million dollars of stock in the last year.  Of course, he claims it's just an asset allocation move for his personal finance, but it appears that this captain is not going to be the last one to leave the ship.

What's the time bomb, you ask?  News items regarding OPTION ARMS are becoming more and more commonplace in the media.  As homeowners become aware of this situation, many will find themselves in predicaments similar to those individuals described in a recent Business Week article.  A house that's worth less, a mortgage with a higher balance, and a payment that the homeowner can't afford  As a real estate professional, you are likely to be contacted by past clients for advice about what to do with their Option ARM loan.

What's an "Option ARM"?  It is typically a monthly adjustable rate mortgage with just a payment cap and a life of the loan interest rate cap.  Some new variations are out, but the monthly Option ARM is what was most popular over the last few years.  You know - it's that loan you get 5 offers in the mail every day that look like something else, and say - " You can refinance for a payment of $400 per month!!!"  Well, like every offer that seems to good to be true, this one has a catch as well.

The Option ARM is a great tool for a high cash flow client who is saavy financially.  Unfortunately, your average "Joe Six Pack" type of guy has been getting these loans.  The Option ARM starts with a low payment rate of something like 1%.  Some unscrupulous mortgage villains will tell borrowers this is the interest  rate.   Your payment stays at 1% for a year, but the interest rate adjusts at month two.  Typically to a rate of above 7%, sometimes even above 8%.  What happens to the difference?  It get's added to your loan amount every month, so you owe more on your house every month.  The good part of the loan is that you have the option to pay the minimum payment, an interest only payment, an amortizing payment, and sometimes a 15 year payment. 

Unfortunately, the typical American pays the minimum.  Now a lot of mortgage guys have been misled into selling this loan to everybody and telling them to pay the minimum and invest the rest!  The catch is, that most people don't invest the rest.  Payments go up year two, year three and then bam!, the recast hits - which is when you start having to pay down the loan.  All those jet-skis and big screen tv's the borrower bought on his credit card make it so he can't afford his house payment anymore.

Is the Option ARM a terrible product?  No.  For a disciplined and financially savvy borrower, it can be a tool that they can use to manage their cash flow.  But a lot of mortgage villains have preyed on the masses of borrowers who don't understand what they got.  Those masses, and we will start feeling the pain in the next few years.  Why did these mortgage villains push these loans on the unsuspecting?  Big paydays.  If a mortgage villain put a borrower into a loan with a 3 year prepayment penalty, he could get paid BIG dollars by the lender as a bonus, not thousands, but 10's of thousands (at least on the coasts). 

There are basically three options for homeowners that are in an Option ARM: refinance into a new loan; sell the property; or do nothing. Unfortunately for some, refinancing may not be a viable solution.  If they have been making the minimum payment each month, their loan balance has been increasing and may be at a level where a new loan is not something for which they can qualify.  Selling the property may be the answer to avoid delinquent payments and possible foreclosure action should they not be able to make the higher payments once the loan adjusts.  But again, they may owe too much to the lender to sell!  A borrower in a situation where they owe more than the house is worth, and they cannot afford the payments, should call their lender and Realtor and negotiate a short sale to avoid foreclosure.  Finally, for those homeowners that have stayed current with the interest that is due on their Option ARM(i.e, not just made the minimum payment), they may be able to sit tight and continue to make payments at their current levels.  Since they haven't experienced any negative amortization, they won't be subject to skyrocketing payments, so they can do nothing and be fine.

You may want to reach out to past clients of yours that you know obtained an Option ARM over the past 3 years.  This would be a great opportunity to re-connect with your client base and show that you are concerned about their situation.  Even if they didn't obtain an option ARM, just getting a phone call from you would be appreciated I am sure. 

So - remember Granny's wise words:  "If it sounds to good to be true, it probably is".  Seek guidance from a quality, qualified mortgage professional who will guide you into, not just the "mortgage du jour", but the mortgage that allows you to achieve your short and long term financial goals.

Comments (6)

Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos
Brett, Excellent explanation of this financing option.  It seems that it was offered to anyone whether or not it was the correct application.  i winder where all those loan agents are now.  Running for cover I suspect.  Do they have any liability ?
Jul 25, 2007 08:59 AM
Marc Blasi
Palm Beach Gardens, FL

True - if it sounds too good....

It's a shame because it IS a good 'tool' for someone who understands how to use it.

It's just sold to SO MANY people who really have no understanding of what's going on.

Gee.... I wonder what company you're talking about.....

Jul 25, 2007 09:00 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Brett... your reference to Countrywide. Was it about 2 1/2 years ago that even these Option Arms started to hurt them. At one point they went to World Savings and tried selling them about 17 to 27 million in pay option arm loans because they realized they got into a market that was starting to hurt them.

In any case, you are right on the money when you said that these are good loans for the savvy investor. And not the person that is going to pay the minimum payment the whole time.

jefff belonger

Jul 25, 2007 09:10 AM
Brett Reichel
Homebridge Financial Services - Rancho Cucamonga, CA
MLO 210215

Bill - those originators might have some liability, they might not.  So much is disclosed up front that people just sign without getting an explanation.  I was talking to a Doctor's wife the other day and  their previous mortgage broker made over $25,000 on her $500,000 loan.  This was an A+, plain, vanilla loan.  Then when they refi'd they had a $15,000 pre-payment penalty.  She certainly was no longer a "customer for life" of that previous broker. 

Certainly, many of the new laws being adopted by states that will ultimatiely hurt the real estate market are due to these types of abuses by originators.   We are getting notices from a number of lenders pulling out many types of loans in Minnesota currently due to the change of the law there.  If you get an approval by Fannie Mae's or Freddie Mac's Automated Underwriting Systems that do not require full documentation, you can no longer do that loan in Minnesota.  We will be paying the price for these bad players for many months to come!

Jul 25, 2007 09:23 AM
Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
Mike Jones NMLS 223495
Brett, it's time for another blog!  It's been too long!
Mike in Tucson
Aug 22, 2007 03:20 PM
Robert Spaight
Homestar Mortgage - Barrington, RI
Great post Brett.  I have never been a fan of the OptionArm and to date (10yrs in the business) have yet to write one.  This type of financing can be a powerfull tool for the financially savvy borrower but unfortunately it was marketed to all the wrong people.  Buyers were attracted by the "teaser rate" and believed that this was their true interest rate.  When given pmt options that differ by several hundred dollars, the majority of borrowers will send in the "minimum pmt" not realizing that the pmt is not even covering the monthly interest due and shortfall is being tacked on to the back end.  Borrowers are shocked when they realize their mortgage balance is now higher than the original loan amount.  Borrowers with these loans bear some responsibility seeing that they did sign on the bottom line, however we all know that there were plenty of unethical mortgage brokers pushing this product without making sure their clients had a full understanding of the potential negative aspects.  They sold the intro rate and minimum pmt to the not so savvy borrower.
Aug 23, 2007 01:36 AM