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Over the weekend I finally caught the movie, No Country for Old Men. It’s critically acclaimed and several friends recommended that I go see it. At times the movie was boring and slow. At times it was quick witted and interesting. However, most of the time nothing about the movie made sense.

In the current mortgage landscape nothing makes sense.

I still get several refinance requests from the internet where people are shopping and getting quoted rates that haven’t existed in years. Moreover, to get a loan closed today is much more difficult than ever before. So for anyone to do a loan at the lowest possible rates doesn’t make any business sense.

Some requests are for home purchases by real estate investors. Every day lenders are limiting their risk by limiting what a mortgage broker can and cannot submit. Every day programs are disappearing. There are very few high risk loans available. It’s only a matter of time before buying a home with no money down will become extinct.

Most of the inquiries I get are questions. Simple questions such as “Is now a good time to refinance?” or “Will not paying my bills hurt my credit?” The people who ask these don’t give me any information about themselves just a name and an email. That’s like asking your optometrist (eye doc) “Do I have ocular degeneration?” without having him/her/it look at your eyes.

Just like the movie, No Country for Old Men, there is no end in sight to all the madness.

Here’s a mortgage primer on which loans are no longer the flavor of the month on Wall Street. They’re the Michael Vick’s of the mortgage world, they were once very popular on but now nobody wants to be associated with them. Okay, that’s a little bit too harsh since these loans didn’t kill dogs. Then again, these loans have put families in dire straits so lets keep the Michael Vick analogy.

Loans the Wall Street doesn’t like:

• THE LOANS WITH THE REALLY REALLY REALLY LOW RATE AND LOW MONTHLY PAYMENT

Also called: 1%, NEGATIVE AMORTIZATION, NEG AM, OPTION ARMS, PAY OPTION ARMS or

“A CAN OF WHOOP ASS WAITING TO HAPPEN”

• THE LOANS FOR BORROWERS WITH REALLY REALLY REALLY BAD CREDIT HISTORIES

Also called: SUBPRIME, NON PRIME, POOR CREDIT, 2/28s, 3/27s, or

“I GUESS THIS IS WHAT I GET FOR NOT PAYING MY BILLS”

• THE LOANS FOR BORROWERS WHO HAVE GOOD CREDIT BUT WHOSE OVERALL LOAN APPLICATION DOESN’T MEET FANNIE MAE OR FREDDIE MAC’S STANDARDS

Also called: ALT-A or

“SO I’VE GOT GOOD CREDIT AND A GOOD JOB BUT I’M PENALIZED FOR NOT SAVING ANY MONEY”

• THE LOANS FOR BORROWERS WHO CAN’T REALLY REALLY REALLY SHOW HOW MUCH MONEY THEY’VE MADE OR HOW MUCH THEY HAVE SAVED UP

Also called: STATED INCOME, STATEDSIVA, SISA, NO DOC, or

“DON’T THEY HAVE LOANS FOR PEOPLE WHO DON’T HAVE JOBS?”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PUT ANY MONEY DOWN

Are called: 80/20, 100% Financing, NO MONEY DOWN, 103%, 107% or

“I WANT A LOAN WHERE I GET TO KEEP MY MONEY IN CASE MY JOB GETS OUTSOURCED TO INDIA”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY DON’T WANT TO PAY AN AMORTIZED PAYMENT

Also called: INTEREST ONLY, IO, or

“IF I LIKE PAYING DOWN PRINCIPAL MY PAYMENT GETS RECAST TO A LOWER PAYMENT EVERY MONTH”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY WANT TO BUY A HOME THEY HAVE NO INTENTION OF LIVING IN

Also called: INVESTMENT PROPERTY LOANS, NON OWNER OCCUPANCY, NOO or

“I’M GOING TO BE THE NEXT DONALD TRUMP”

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY MAKE A LOT OF DOUGH

Also called: JUMBO, NON CONFORMING, SUPER JUMBO, MILLION DOLLAR LOANS, ANYTHING OVER $417,000 or

“THAT’S PRETTY LOW FOR A RATE OF RETURN AND PRETTY HIGH FOR A MORTGAGE INTEREST RATE”

It remains to be seen if Wall Street still likes:

• THE LOANS FOR BORROWERS WHO REALLY REALLY REALLY HAVE NO INTENTION OF LIVING IN THEIR HOMES FOR 15 to 30 YEARS

Also called: ADJUSTABLE RATE MORTGAGES, ARMS, 3/1, 5/1, 7/1, 10/1, TEASER RATE LOANS, HYBRID LOANS, BALLOONS or

“THE AVERAGE PERSON MOVES EVERY 5 to 7 YEARS, SO WHY SHOULD I GET A LOAN FOR 30 YEARS?”

Wall Street will always like:

• THE LOANS WITH REALLY REALLY REALLY NO RISK

Also called: FHA, VA, CONFORMING, FANNIE MAE, FREDDIE MAC or

“THE LOANS THAT MAKE UP THE MAJORITY OF THE AMERICAN MORTGAGE LANDSCAPE”

A borrower calls me after finding my blog and starts the conversation with “OK Einstein, where are rates headed?” I usually expect an opening line like this from friends or just about anyone with a New York accent. Although the caller was sans the accent he could’ve easily been one of my wise-ass friends so I responded with a sarcastic “What’s it worth to you?” The person on the other line paused for a second and said “Seriously, do you think rates are going to go up any higher?” I paused for a second and said, “so let’s step back for a second, you really found my blog on the web, called me and started your call with OK Einsten…. wow!”

For the next ten minutes we discussed remortgaging which is a fancy term for refinancing. I explained to him that many people who have a 5 year ARMS have extremely low rates so their extremely hesitant to refinance. Luckily he had all his documents, I asked him to take out his NOTE so I could go over how his ARM will adjust.

His current rate: 5%

His current margin: 2.25%

His current index (12 month LIBOR): 5.49%

His caps: 2/2/6

• His first year adjustment has a maximum adjustment of 2%
• Each subsequent year can adjust a maximum of 2%
• With a lifetime maximum adjustment of 6% above the original rate of 5% or 11%.

His adjustment will take place sometime next year. Unless his index drops significantly, his rate will probably adjust to 7%.

After talking to the caller, somewhere along the line we became friends. We discussed golf. We discussed houses. We discussed 529 plans. He was looking for advice, not a loan. At the end of the call, he thanked me for my time. I added the caller’s name to my rates watch database and hope to hear from him when he’s ready to either purchase his next home or refinance when rates drop.

“Is it ignorance or apathy? Hey, I don’t know and I don’t care.” - Jimmy Buffet

Apathy: the trait of lacking enthusiasm for or interest in things generally
Ignorance: the lack of knowledge or education

According to a Bankrate survey 34% of homeowners don’t know the type of mortgage they have.

These were the key findings of the survey:

Homeowners:

• 36% who now have an Adjustable Rate Mortgage (ARM), plan to refinance to a fixed-rate loan when their ARM changes
• 28% of those surveyed worry either regularly or sometimes about how they will afford their payments next year
• 57% of homeowners polled have a fixed-rate mortgage

Your home is your biggest asset/liability depending on how you view your home. Most people either have one of three kinds of mortgages because there are only three kinds:

1. fixed rate mortgage which means it’s fixed for 10, 15, 20, 30, 40, 45, or 50 years
2. an adjustable rate mortgage which means it’s not fixed, it will adjust at some point
3. a negative amortization mortgage which means if you don’t know what kind of mortgage you have then this loan is not for you

If you don’t know the mortgage interest rate and the mortgage loan program you’re in, simply find your mortgage documents and find your NOTE and read it!

Back in September, the Feds came out with a press release entitled: Federal financial regulatory agencies issue final guidance on nontraditional mortgage product risks–September 29, 2006. The purpose of this press release was to address the problems our nation has been having with high risk mortgages.

These products, referred to variously as “nontraditional,” “alternative,” or “exotic” mortgage loans (referred to below as nontraditional mortgage loans), include “interest-only” mortgages and “payment option” adjustable-rate mortgages. These products allow borrowers to exchange lower payments during an initial period for higher payments later.

These loans often carry the following layers of risk:

• Interest Only

: Interest only payments do not require principal reduction therefore your loan balance stays the same.

• Adjustment of Rate

: When adjustable rate mortgages begin their adjustment phase, your loan payments may increase.

• Negative Amortization

: When you only make the minimum payment your principal balance increases every month.

• Prepayment penalties

: If you decide to refinance or sell your home before the penalty expires, you may face severe monetary penalties.

For more on the Feds effort to explain high risk mortgages, check out these addendum’s which explain:

1. Risks of Non Traditional Mortgages
2. Key Facts About Interest Only and Payment Option Mortgages

Phil’s take: I take pride in understanding these “high risk” mortgages inside and out. However, it took time to really understand all the nuances. On the other hand, a borrower has a month, maybe less, to really understand what they’re getting themselves into. The above documents are a good start but it won’t deter mortgage companies from coming up with even more complex loan programs in the future.

I’ve been tracking this blog: www.iamfacingforeclosure.com for quite some time. Casey Serin, a young dude in his mid 20’s decides to become a real estate investor and does it without deep pockets or the necessary income or assets to qualify for the mortgages on the investment properties he buys.

I’m a 24-year-old aspiring real estate investor from Sacramento CA. After going to few seminars I bought 8 houses in 8 months across 4 states with no money down. I fixed and sold 2 and then ran out of cash. I am now facing foreclosure on 5 houses. I’m learning my lessons, finding solutions and blogging about it. Comments appreciated!

Casey’s blog has gained national exposure including an article in USA Today entitled 10 mistakes that made flipping a flop.

Here’s a summary of the 10 mistakes:

Mistake No. 1 - Using ‘liar loans’

Mistake No. 2 - Overpaying

Mistake No. 3 - Lacking cash

Mistake No. 4 - Quitting your day job

Mistake No. 5 - Hiring an unlicensed contractor

Mistake No. 6 - Buying sight-unseen

Mistake No. 7 - Buying out of state

Mistake No. 8 - Buying too many properties too fast

Mistake No. 9 - Underestimating remodeling costs

Mistake No. 10 - Having a poor exit strategy

Casey isn’t the only one who caught the real estate investment bug and failed miserably but he’s the only one to really document his story as an RSS FEED.

Senator Wayne Allard spoke at a Senate subcommittee hearing on the mortgage dilemma that faces the state of Colorado in a Denver Post article entitled Senators: Borrowers don’t understand mortgage risks.

First up the political jargon:

Consumers “must have adequate information. The information must also be clear and meaningful,” Allard said Wednesday. “Consumers should understand exactly what risks and benefits different products represent.”

Next up, what the banking regulators have to say:

Banking regulators including the Federal Reserve and the Office of the Comptroller of the Currency are working to upgrade lenders’ disclosure and loan-qualification procedures.

What Phil has to say:

The mortgage industry is full of a**holes who don’t even know how the Option Arm or Interest Only Loans work, yet sell them with reckless abandon. However, these high risk loans have allowed many Americans the opportunity to buy a home with little to no money down. Is that such a bad thing?

Borrowers receive disclosures at loan application. At closing the borrowers receive a Note, Riders, and a Truth In Lending document. These documents scream “PROCEED WITH CAUTION!” Hot tip to borrowers: START READING THESE DOCUMENTS!

One of the most disappointing experiences in my young career as a mortgage professional is when potential borrowers called me to let me know that they were going with the real estate agent’s lender. Their exact words were “We liked you better but we got a better deal.” The bad news came on the heels of me working til 12 AM the night before getting the loan documents ready to submit to underwriting the next day. It was a bitter pill to swallow.

Whether or not my potential borrowers did in fact get a “better deal” is highly unlikely. More often than not, borrowers end up with higher rates than what they were initially quoted. The stark reality of the mortgage business is that it’s super competitive. However, with competition comes deceit and fraud. When you swim with sharks, the sharks call it “salesmanship” or “doing whatever it takes to get the deal.”

When I meet with borrowers that I know are rate shopping, I challenge them to be more BS sensitive than RATE sensitive. I also tell my borrowers how to shop for a mortgage, following three simple rules:

1. Shop on the same day. Rates change every day, sometimes during the day. So shopping on different days or different weeks is not very effective.
2. Get a good faith estimate then compare only the 800 section. These fees are what lenders charge. The title fees, reserves, government recording fees, etc. are variable.
3. Buy Tylenol or Advil. Shopping for a mortgage is a headache and if you choose poorly, expect your headache to get worse.

Last rule…. if a lender says “I can get you the best rate” or “I can beat my competitors rate”, you should seriously consider another lender. As lenders, we all lend money from the same pool, so there’s not much discrepancy in rate but a huge discrepancy in service. So shop wisely!

Business week has an article entitled “How Toxic is Your Mortgage” which condemns the Option Arm loan program. The article explores the history of the option arm and the risk associated with a negative amortized loan.

For cash-strapped homeowners, it was a pitch they couldn’t refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn’t even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket.

Consider the following questions when evaluating this loan product:

• Do you understand the start or introductory rate?
• Do you understand the margin?
• Do you understand the index?
• Do you understand the effective rate?
• Do you understand the four payment options?
• Do you understand the minimum payment?
• Do you understand negative amortization?
• Do you understand the recast payment?

If you can answer all these questions, then maybe, just maybe, this loan is right for you!

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