The Industry's Situation
When it comes to the mortgage industry, no one is getting policed more than the brokers. A broker's job is to locate a customer need, match a product in the market with that need and then counsel the client through the application process. Brokers have been receiving a lot of bad publicity due to a number of reasons. The main issue seems to be placing clients into loans that they can not afford. I, a mortgage broker for New Wave Lending Corporation, have recently ran into a certain problem with a client that had been mislead. I feel privileged to say that I have rescued a couple from the Pay-option ARM "Equity Builder" loan. The following is a description of how I did my part in policing the industry that I have chosen for my profession.
The Pay-option ARM Equity Builder Mortgage
As you may already know, the controversial Pay-option Adjustable Rate Mortgage (ARM) gives the borrower an option to make a minimum monthly payment, an interest only payment and a fully amortized payment. The minimum monthly payment is calculated at a "teaser rate", which is a payment that does not fully cover the amount of interest that is due. The remaining portion of the interest that was not paid with the minimum monthly payment is then deferred onto the principal balance of the loan. This means that the principal amount owed on the mortgage actually grows by making the min. payment due. The interest only payment pays the full amount of monthly interest due without deferring any interest and the fully amortized payment decreases the loan balance accordingly by applying money to the principal of the loan.
Some Pay-option ARMs have been coupled with a feature known as "Equity Builder" (EB). This feature allows the borrower to make bi-monthly payments which will amortize a mortgage 26 times per year as opposed to 12 times on a standard monthly mortgage. This feature is the equivalent to making one extra payment per year if the borrower is paying a fully amortized payment (principal and interest). It reduces the total amount of interest paid by a borrower by effectively paying off the debt faster. Sounds great, doesn't it?
Well, the EB feature does have some stipulations. The EB can only be paired with an ARM. The EB also has a conversion feature that allows the borrower to convert their ARM into a fixed rate without refinancing but, the EB feature drops off if the borrower exercises this option. So, you may be asking yourself how the Pay-option ARM EB accomplishes what the name implies. The short answer is that it doesn't.
My Recent Rescue
A couple in Virginia had been looking into getting cash-out for home improvements. This couple had been contacted by a mortgage broker who wanted to "help". He offered them two products. The first was a 30 year fixed at 6.75% and the second was a Pay-option ARM EB loan at 1.5%. But 1.5% sounds too good, what is the catch? The broker then proceeded to sell the product as a loan that would pay down their balance in as little as 18 years, WHILE MAKING ONLY THE MINIMUM MONTHLY PAYMENT. The rogue broker also did not disclose the fully indexed interest rate on any of the email transmissions, phone conversations or loan disclosure documents. This couple was lead to believe that they were getting a 30 year loan with a 1.5% interest rate that could be paid off in as little as 18 years. Wow is right!
I happened to run across this couple's information and gave them a call. I informed the woman that I knew that she had been recently looking into acquiring a new mortgage and that I wanted to help her out. I told her that New Wave Lending was able to find some of the most competitive interest rates in the market and that I would love to give her a second opinion. She then asked me if I could beat a 1.5% interest rate. I then started asking her a series of questions to probe the real interest rate that she was being offered. She had no clue! I told her to send me the loan disclosure forms and email transmissions that the other broker had sent to her. I recognized the fraud immediately.
We then set up a conference call where I was to play the role of the couple's well informed son. The couple informed the broker that they had their son on the line and that I had some questions about the specific program that was being offered. Without hesitation, the broker began to pitch me on the same benefits that he had mislead the couple on. I told him that I used to be a mortgage originator and that I fully understood the program that he was selling. This information did not effect him and he continued with his misleading explanations. In short, I told him that I knew he was lying through his teeth and that I wanted to know what the "fully indexed interest rate" was for this product. He then told me that he did not have that information in front of him and that he would have to check with his operations manager to find that out.
The manager eventually came on the line after holding for ten minutes. The manager tried to smooth the situation over with general terms and evasion tactics. He actually tried to defend the way that his loan officer was selling the product and that nothing illegal had been done in the process. We all know that tracks can be covered by a tree branch but the branch also makes an impression. This just angered the customer even more and they are now pursuing legal action.
What Should Be Done
We should all do our part as mortgage professionals (not scam artists) to police our own industry. In Ohio, there has been a number of cases where brokers have mislead their clients into getting something they aren't. This only makes a bad reputation for those of us who are trying to make an honest living. Report those crooks who are essentially taking money out of the pockets of consumers and honest professionals. We as licensed loan officers need to take a stand before the regulations squeeze the honest people out of a career.