The Jokers, Fools, and Wolves in Home Finance

As the ultimate showman of his time, P. T. Barnum sure knew how to draw a crowd. In fact, as he lined his pockets with their dough time and time again he became famous for his quip that "there’s a sucker is born every minute."

But while Barnum may have profited from this time-tested truism, he never said it. It was actually said by one of his competitors-David Hannum, a banker, which certainly seems fitting given the current state of the lending business.

I say this because even though consumers are now constantly being warned about the dangers of risky mortgages, there are still jokers out there continuing to push these products in hopes of finding some suckers.

In fact one of their fool’s baits came across my fax machine this morning. And like all of the hundreds of others that have preceded it, it promoted the existence of the "1% MORTGAGE" that promised to save its borrowers "THOUSANDS OF $$$$$$$ PER YEAR."

It went on to scream that Interest Only, No Documentation, Cash Out and No Money Down programs were their specialty. And while all of that may be true, I suspect their real specialty is predatory lending.

The program they were pushing this time was an "Option ARM." It’s one of the favorite programs that these wolves try to push, not only because is it easy to qualify for but it’s also because low initial payments are the ultimate bait. That’s the reason they call them "teaser rates" to begin with.

But while these initially enticing rates are quite marketable to the "monthly payment nation" that buys them, it doesn’t take long before the payments on these loans nearly double. When that happens, it nearly buries many of the people that got them with no clear understanding of how they worked in the first place.

To make matters worse, even if these troubled borrowers are able to make the higher payments, they often do so at the "minimum payment" amount, which adds the uncollected interest to their loan balance, driving them deeper in debt.

It is exactly the kind of toxic program that the recently released "Interagency Guidance on Nontraditional Mortgage Product Risks" is attempting to rein in.

Despite this, it is a program that has yet to be killed. It’s still being marketed and sold to unwitting consumers by unsavory types everywhere.

I threw their fax in the trash where it belongs, and you should too.

Remember, not every lender is predatory, but every predatory lender sends faxes, emails, and postcards with the promise of a deal that is too good to be true.

P.T Barnum would have seen it coming a mile away.

Mortgage Matters

Steve,

You write quite a bit about "subprime loans" and their pitfalls. I’m wondering, what exactly is a "subprime" loan anyway?

Thanks for the info.

Pete B.

Pete,

It’s really simple: A subprime lender is one that loans money to borrowers who cannot qualify for one of the "mainstream" products, such as VA, FHA, and Conventional Conforming loans.

Usually what makes a borrower a subprime candidate is a poor credit score, which usually means a score lower than 580.

Because these lenders loan to the riskiest set of borrowers as determined by their credit scores, they are able to charge higher rates and fees as a way of offsetting their risk.

One of the problems with these lenders, however, is that they never tell their borrowers that they are subprime lenders when they solicit business through their advertising.

The result is that numerous borrowers who would otherwise qualify for a mainstream loans end up paying higher rates and fees to these lenders because they take the subprime deal without looking at their other options.

But that is not the only problem. Because these lenders are many times the last resort for many desperate borrowers, such folks are often at their mercy. The result is that they will often saddle these borrowers with higher rates and prepayment penalties that are quite different from those disclosed on application. These surprises are often overlooked by the borrower at settlement because of their frequently desperate situation.

So while these loans no doubt fill a definite need in the marketplace, getting one often requires a little extra due diligence.

By the way . . . subprime lender ECC Capital Corp. of Irvine, CA, posted a stunning $54 million loss in the third quarter, citing loan buybacks and early payment defaults. Through the first nine months of the year, the publicly traded company lost almost $80 million. In its earnings statement, ECC said it is continuing to "experience higher levels of repurchase claims generally relating to early payment defaults." Almost 6% of Encore’s loans are in foreclosure.

Also according to figures released Tuesday, the sales price of existing homes dropped 3.5% in October. This year over year decline was the biggest drop on record.