Pay Option Arms - Suicide in a Mortgage Loan

I absolutely disagree. Pay Option ARM's are NOT for everyone. People who are using the POA as their only means for affording a home are making a mistake. I use the POA to free up cash flow on some high value properties that increase in value at least 3% per year. To qualify for a POA you MUST qualify for the fully amortized payment. There are some very simple formulas for determining whether a POA will work on a particulat property but, again, if the borrower is using the POA to free up money to spend on other items that will only increase in value, yes, it's a very bad idea. It's helping me to build wealth and when I have dealt with people about it we discussed all these points in detail. PAID MORE TO SELL POA's? HA! Especially not in Georgia. Ever heard of the Fair Lending Act? Lenders don't PAY more. Brokers CHARGE more to EARN more. Maybe it's different in Texas. Bad press for a great loan for people who can handle it and deserve it. By the way ... you CAN make principal reduction payments every month and you'll still pay down your principal at the same rate with a MUCH lower monthly payment. Guess I have another blog to write! Thanks - you still get an UP because, unlike some folks, I think if you take that much time to research and start a conversation based on your beliefs and research you get an UP.

Hi Ken, after I commented on your blog (and gave you an UP rating ;) I reflected on some conversations I've had recently and some of the blogs I've seen not only on AR but on various other sites of interest related to real estate. We all write or speak from our own standpoint which created this blog My Own Little World Thanks from my own little world in Atlanta, Georgia! 

And by the way ... there is a limit to YSP in Georgia so that's the HA! You got from My Little World. In other words what's true in Texas isn't necessarily so in Georgia. Evidently predatory lending is welcomed in West Virginia ... but then again that's a pretty liberal state government.

I'm not even going to start.  Blogging about the negative effects of neg am ARMs by mortgage brokers awfully Monday morning quarterback of us.

Let's stipulate that neg ams are not for everyone and not dwell on the mistakes so many borrowers made. 

The more we point fingers at each other, the less confidence it inspires in our industry. 

This is like saying that some people were unfairly pushed in FHA ARMs in the 90s and that people could lose there house if rates went up.

Well, Apparently Texas has one Lender that will do the Pay Option ARM at 100% (80/20) as I got an ear full about it today.  I represent sellers on a property that was supposed to close on Aug 25... we're still waiting.  Since there is only 1 lender doing this, starting just a couple of weeks ago, apparently LO in the area sent them files, and now there's  a back up of files.  The LO finally made the decision to send the file to her normal lender and the buyer is going to bite the bullet with 7% instead of 2.5%, but my sellers are sick of waiting for this to close!

NAMB Responds to BusinessWeek Article

NAMB President Harry Dinham, this week sent a strong rebuke to BusinessWeek Magazine for its inaccurate and irresponsible portrayal of Mortgage Brokers in a September 11 story about the rising popularity and dangers of pay option ARM loans. Read the NAMB letter to BusinessWeek or the BusinessWeek article.

And thus my continued thrust for required licensing and CE's for every loan originator. Not just the broker or one designated employee, but every loan officer in the United States regardless of there affiliation whether direct lender, mortgage broker, state or federally chartered banking institution, or any other organization. If it loans money on primary residences and it has employees and it talks to customers - even if it is one of the national dot coms who have "loan operators" I am pushing for licensing. Licensing and CE's won't stop it all but it will slow it down. And you're right, my defense of the POA is better than Mr. Dinham's but I'm likely a better communicator. ;)

The negative press of pay option ARMs (and now stated income loans) is the result of a huge influx of inexperienced individuals into the mortgage industry who were lured by the idea of a "Quick Buck".  The Pay Option ARM while its popularity is only in the last couple years has been around for at least 15 years.  It is a case of inexperienced people selling something they don't know enough about, to people who know even less.  I think that Pay Option ARMs, when explained to the borrower completely, can be a good loan for just about anyone.  It is also an ideal loan for specific types of borrowers.  I have one on my own house, not for the minimum payment, but for the flexibility of payments.  In our industries, or anything commission based, there is the eb and flow of income on a monthly basis.  So for me it is an ideal loan, if I have a slow month I can make the minimum payment instead of paying for groceries with a credit card, and on heavy months when I barely have time to get to closing let alone go grocery shopping I can make a 15 year payment.

Ken, good post. POA's are a great tool for those who truly understand them and are willing to micromanage their mortgage, but for the majority they will default to the minimum payment. I like the new hybrids better, fixed rate for 5 years, but they are still fraught with danger if all they do is pay the minimum.

I also agree that many LO's have specialized in POA as they could make 3 pts YSP.

It seems that POA's should at the minimum be treated like Reverse Mortgages and require special licensing...

Ken, thank you for taking the time to write on this and other subjects of interest. 

While many comments and opinions are listed here, I stand by the belief that the Negatively Amortizing ARM aka PayOption, PickAPayment, Option ARM, et al are a great loan program for the right borrower.  We as mortgage professionals, the ones who actually determine borrower suitability before making any type of loan recommendation have a responsibility to our communities, borrowers, lenders, and to ourselves. 

Those who offered the NegAms to borrowers who shouldn't have been in them in the first place are not mortgage professionals in my opinion, they do not hold any regard for others nor themselves.  What do I mean?  Think about it, those non-professionals hyped and sold these loans to borrowers who really couldn't accept the risk through a declining home values or increased mortgage payments, are huring themselves since their own homes will also rise and fall with the local economy based upon job performance, sales, etc. 

NegAm Loans are a great tool, however for the average consumer they are a Suicide Loan indeed a foreclosure waiting to happen . There is an excellent report about the NegAm Loan at www.homeloans.cc Consumer Alerts Report #2.

More than likely the loan officer who explained it to the borrower doesn't even really understand how it works themselves, nor to they care, since they were offered over 3% YSP while providing the borrwer a nice 3.75% or 4%+ margin, very nice indeed (NOT).  

Those loan officers who jumped in the business, rode high on the hog and took advantage of the consumer are probably not in business today, I even want to go as far as stating that most, if not all of them weren't even licensed.   Frankly, I am glad that many of those loan officers, lenders, realtors, and the like are out of business and am greatful that more of them will soon be exiting as they begin to default on their own mortgages by overextending themselves and allowing greed to get the best of them.

Currently, I am aware of an experienced "loan officer" in my local who purchased his McMansion in early 2004 for $340,000, borrowing $323,000 from First Franklin.   In Decemer of the same year he borrowed another $100,000 from a "private lender".  Then at nearly the PEAK of the market in July 2005 he refinanced to just over $450,000 with New Centrury at 6.625%. The market was still increasing slightly in early 2006 when he borrowed another $55,000 from the same "private lender".    In December of 2006 he was served with a Notice of Default and then in February 2007 was served with a Notice of Trustee Sale.  According to "sources", he was able to salvage (reinstate) his home and brought the $26+ in payments, penalties, arreas and fees current.   I am not sure what will happen to this guy and how the events will truly unfold, however if he is foreclosed upon he will be able to get out from under the debt and the lenders who hold the paper will suffer losses.  He may be issued a 1099-C Cancelled Debt notice from his lender(s), which will get reported to the IRS as income, which will further increase his already mounting tax liablities, etc etc, do you see a pattern here? 

I know that no one is immune from the effects of overextending yourself, which was clearly the case, otherwise why would he encumber his property to over $500,000 or by 50% more than he paid of it only a few years ago?  Perhaps he also believed that "real estate never goes down, its an always appreciating asset..." right?  Right...

Recently, I had lunch with a title representative who lost his position with a national title company.  He was earning about 17k a month at his peak and he spent ALL of it.  Currently his home, which he purchased in mid-2005 at the peak for $390,000 is hitting the foreclosure streets.  He has no means of stopping the foreclosure. He has a new industry job earning about $55,000 yearly, a far cry from his $200k gig.  His expenses, all inclusive are about 12k per month, and while earning 6k puts most of those expenses into the toilet his general outlook is positive.  He made a big mistake and he knows he'll pay of it too. 

During the housing value peaks, I saw another "experienced" loan officer/broker actually, struggle through various foreclosures of his own home and rentals.  Matter of fact, recently he had one of his rentals on the foreclosure streets that sold at auction.  The reason he didn't salvage it was due in part to the large IRS liens attached to it.  Wow!  We all win some and lose some is what he told me in so many words.

These people and others like them are representing our clients and they are having difficulty managing their own affairs.  Can they offer good advice?  Are they able to offer their borrowers good counsel while they are one wave from drowning themselves? Would you seek counsel from these people?  Did they make mistakes?  Can they learn from them, will they? 

As mortgage professionals we have a duty, a responsibility, an ethical viability to counsel our clients the bet way we can, no matter the product.  I applaude all of you who uphold these covenants and practice sensible and responsible lending, guiding your clients, borrowers, and prospects to the best of your abilities. 

Thank you.

PS Kudos to "Paula" for her entertaining and oddly true reality of the way things are...

 

Good grief.

Intersting article.