I wasn’t planning this post to be part of my debt series but when I saw the front page of the Seattle Times this morning…the timing is uncanny.   Borrower, beware:  debt disaster looms as rates rise on easy-money.   

This is a tale of a couple who was turned down my many mortgage lenders for zero down financing because they had no savings and $20,000 in credit card debt.  They are a common portrait of a subprime home buyer over the past 2-3 years.

I have issues with both their loan originator AND the subprime borrowers in this report.   

"The couple signed two mortgages to buy their $246,800 house in July. The first loan, a so-called pick-a-payment loan for 80 percent of the deal, had a variable interest rate. The second mortgage, at 12.5 percent interest, covered the rest. The deal included a pre-payment penalty on the first mortgage, and a balloon payment on the second.

Not long after they signed the loan, [the home buyer] decided to dump her sedentary office job to become a personal fitness trainer. The new job paid less, $7.89 an hour, but she had the opportunity to earn commissions as she brought in clients."

There is nothing wrong with an 80/20 subprime mortgage when it’s structured correctly and the clients understand that they have 2-3 years to prepare for refinancing.   This means they need to improve their credit scores (having a mortgage paid on time helps credit scores) and to reduce frivolous spending.   They need to be accountable and take a hard look at themselves and their finances.   Switching from a fixed income, even if it’s a boring job, to a new career that pays commission is irresponsible as a brand new home owner.

The pick a payment program is negative amortization and is not the best program for anyone with 100% financing, let alone a subprime borrower.    In fact, it’s probably the worse program a first time home buyer (subprime or not) could have.    They will 9 times out of 10 opt for the lower (deferred interest) payment and not fully grasp what the consequence are when their mortgage recasts at the higher rate and fully amortized payment.

"I had no idea the interest was going to climb like it is — they didn’t tell us that at all," Fultz insisted. "Maybe I wasn’t listening. Maybe I’m not good at words. Negative amortization? I never even heard of that."

Their Loan Originator’s response to this (you might to sit down and put away any sharp objects before you read this): 

"I agree, it isn’t explaining it in full… But…it’s explained to the client 47,000 freaking times."

And to top it all off, the Loan Originator, who’s business primarily consist of feasting on subprime buyers says she can’t make her mortgage payments now due to the decline in the subprime market.

The pullback has cratered the business model for brokers like Mills. She used to write 10 to 15 loans a month. In March, she wrote two. In February? None.

"I didn’t make my own mortgage payment this month," [the LO] said in April. "But nobody feels sorry for me."

Oh boy…someone pass me a hanky!  This Loan Originator closes 10-15 deals typically a month and I’ll eat a shoe if she’s not making more than 1.5% on each transaction.   And a few tight months SHE’s missing her mortgage payment?   

Please work with a professional Mortgage Planner.   And not the first person who tells you "yes".    That type of LO smells your desire to own a home and will take you to the bank.   And they will not be there for you after closing…unless you want a new mortgage! 

Buyer beware, indeed.

Related post:  The Debt Disease:  Dollar Buy Dollar