Washington State Mortgages, Made Clear. Buying or Refinancing? Let's find the right loan together.
This graph from the New York Times paints a picture that I can’t call pretty.
"So what’s gone wrong in the last few months? An unfortunate combination: more loans in default (many borrowers were never in a position to pay them off), risky bets worth billions made by some investors (deals now gone sour), and the reversal of the housing boom."
A big hat tip to Behind The Mortgage.
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
KOMO-4 just interviewed me at my office regarding subprime loans. You can watch the interview tonight during their 6:00 p.m. broadcast.
Update: Here’s a link to the video. Don’t blink…you might miss me!
Let me start by saying, I prefer a “No Income” over a “Stated Income” loan. If you 
have to “state” an income, you’re potentially setting yourself up for committing fraud. A “no income” verified loan (where your income is blank on the loan application) does come with a slightly higher rate than a stated income loan, however, there are no questions about what is questionable…your income!
Recently, a home buyer contacted me for a second opinion on their good faith estimate. They had just made an offer that was accepted on a home. After reviewing his information, he revealed that the loan was stated income. I did not have all of their documentation needed for self employed borrowers (2 years complete tax returns, for starters) since I was just looking at closing costs and the rate. So I asked why they were going stated income. Here is his actual response:
“Let’s just say it’s income we’re hoping to achieve, but higher than what is on our tax return.”
Does that sound a wee bit concerning to you? For one, they are stating income they don’t make in order to qualify for a mortgage. When you’re self employed your income can vary quite easily. What happens if they don’t make the income they “hope to achieve” and they cannot swing their new mortgage payment?
I asked if his Loan Originator was going to have him sign a 4506 or 4506T. These forms are sent to the IRS so the lender (and what ever company your loan is sold to) can verify the income you are stating on the loan application by accessing your tax transcripts directly from the IRS.
“I did ask [our LO] about that, and she said it’s basically a formality – that they don’t actually pull the tax return…it’s just put [the 4506 form] in the file.”
Often times, the 4506 may stay “in the file”. However, if the borrower defaults on the loan, you can bet the first thing the lender will do is to grab the 4506 to compare what was stated on the loan application to the actual income reported to the IRS.
“Since I certainly don’t plan on defaulting, I’m going trust [the LO] and the bank on this one. She’s got an interest in this as well!”
The LO certainly does have an interest in the loan. She’s going to get paid and keep her real estate agent happy. Stated income and no-income verifiers are very easy loans to do as compared to doing a full document loan for a self employed borrower where you have to review and average incomes for the past two years. Yikes…the LO might actually have to pull out their calculator and do some hard math and go through someone’s tax returns. Oh dear!
Let’s assume worse case scenario for this borrower who is all ready admittedly overstating income at what he hopes to achieve…what he suffers a loss with his business and and is not able to keep up with his mortgage? As a self employed person, your income and costs are not secure or stable. This could quite easily happen to the best of people. Now you’re in a mortgage that you could not afford to begin with because you had to over state lie about your income. Should your mortgage go into default, will the LO who put you into this loan stand by you? I doubt it. Plus, she’ll probably state something like “I had no idea they didn’t make that income.” She won’t go down holding the borrower’s hand in this case, far from it.
If you are considering a mortgage where you “state” your income on the loan application, you should know:
Lying about your income, or anything on the loan application, is mortgage fraud. There are many other types of documentation available so that borrowers do not need to go this route (unless it makes sense–ie they actually have the income).
Still thinking about stated income? Watch this video from CBS.
Next to snakes, spiders, deep water and falling down stairs (okay…I have a few phobias!)…and actually this is no laughing matter. There is so much hype in the media right now about the subprime industry and home owners in trouble with 80/20 loans and interest only ARMs, etc. Many people are contacting me to confirm they’re okay or to see if the need to refinance. So far, none of them need to refi (but I’m glad they’re checking with me). Either they’re planning on selling or their ARMs won’t be adjusting for a couple more years and they’re actually quite happy with payments once they step away from the fear factor. These home owners with ARMs and/or 80/20 financing are prime targets for unsavory loan originators to scare them into a refinance (there are even ads on TV soliciting home owners to do so) when they don’t need to. Costing them at least a couple thousand dollars in their equity and rewarding some loser with a commission they shouldn’t have.
How do they do this? For starters, the local title companies can provide list of home owners if they have financing through certain lenders (like New Century, for example), or if they financed within a certain time period with an ARM. The lender may call you (ignoring if you’re on the DNC) or send you a letter stressing their "sincere concern" over your current mortgage scenario. Please don’t buy into it.
Bottom line, don’t panic. The worst decisions are made when someone is being emotional and scared. Lenders who are predatory prey on the emotions of scared people. This type of loan originator is ultra smooth…could probably out-sell me (and I’m sure has) on my best day. (I do not view my career as "sales"). Take a deep breath and do some homework. Make the hoopla over subprime loans into a personal opportunity to review your credit and get your finances in order. It will save you in the long run.
With all this said, some people are in trouble…they are not the majority and regardless, it is unfortunate. If you are in financial troubles or if you feel you may be near it, please do contact your Mortgage Professional (or get a referral) right away.
