Transparent Lender Greed

“FAIRLY WARNED BE THEE, SAYS I” fish restaurant pirate from The Simpsons

I had the privilege of meeting with the nicest couple last night. I consider it a privilege anytime someone invites me into their home and I am twice blessed if they do so for my advice or liability coaching. That being said, it was not a meeting I was overly excited to attend. You see, I had been invited at the request of their Realtor to look over loan docs and share my opinion. Based on my conversation with the Realtor beforehand, I knew this couple would have little to no options and my visit would most probably be a fruitless one. A large part of my business, however, stems from the honest consultations I provide for the Realtors who count on me. Besides which, there are a lot of good people in the lending business and anytime I have the opportunity to repair our general reputation, I consider it a responsibility; which brings us back to last night.

Some quick background: both of these fine, young people serve our nation in the military. They both work in a sensitive area requiring that they be above reproach and this means, among many other things, that their credit must remain strong. They are being transferred soon, need to sell their home and so contacted a Realtor who had impressed them with a listing down the street. During her discussion with them she learned they had recently refinanced their home and were still upset about it. She asked a few more questions, and then I received an anxious call asking if I could please meet with them. Now we are up to date save for one thing: this nice, young, military couple is facing the very real threat of losing their money, their home and their jobs.

In February these homeowners were solicited by a lender to refinance their existing loan. At the time they had a 30 year, fixed rate loan at 6.125%. This may not have been the perfect loan product for them, but it was certainly a safe, reasonable and well priced vehicle for their investment. They told this new lender they did not need any cash out of their home, but if the lender could lower their rate and payment they would be interested (who would not?). A few fast phone calls, some misleading Good Faith Estimates and one very large stack of legal documents later, this fine young couple with great credit scores and a $3000/month payment are the proud owners of a Negative Amortization or Neg-am loan (or Option Arm for those that find the honest nomenclature a little too hard to swallow). Their new interest rate is 8.858% but not to worry as it is subject to change MONTHLY! They have owned this loan for a little over a month and their mortgage has already grown over $2000. Their comparative payment, which is to say the principle and interest payment comparative to what they were paying, is now $4297. Their interest only payment, which is simply the bare minimum required to cover the cost of their money, is now $3993!!! But wait a minute, loans are not free. What did they pay for the pleasure of increasing their payment by over $1000 per month? The closing costs were almost $20,000. This new loan, the sole purpose of which was to lower their rate and payment, added $20,000 to their debt and raised their monthly payment 43%. A loan is a loan though and for good or bad the loan originator deserves to be paid right? The originator pocketed almost $29,000 for his “services”.

This couple had no idea the type of loan they were really getting. They cannot afford the payment. They can make the “option arm” minimum payment, but then their loan grows at least $2500 per month. Since it now looks like they owe more than the home is worth they are faced with a best case scenario of losing their credit and a worse case scenario of losing their home. Either way they lose their jobs because of it.

Usually I write this newsletter with the hope of inspiring others. I know that most of you reading this are probably waiting for the inspirational lesson in all of this. I do not have one. This is simply a warning and a reminder. Whether you are a homeowner, a Realtor or just someone who actually cares about their fellow man, please get a second opinion when acting on the largest investment of your life. Preferably use someone recommended to you and always, always, always get a referred second opinion if you are considering a loan with someone who solicited you. If you need help finding a second lender, contact your Realtor. They should always have at least two lenders that they work with and trust. As in most professions, those of us that are good at what we do; those of us that care about our clients; those of us that actually understand we are coaching people on their very financial future – never have an issue with our client getting a second opinion.

As for last night’s nice young couple with the half million dollar headache, I do not know if there will be any happy ending. I have offered to refinance them out of their loan at no charge, but there will still be some third party fees and besides, they may not have enough equity now to cover the $19,000 pre-pay penalty that came with their loan… did I neglect to mention that before? So did the lender. One final bit of irony: the name of the broker that “helped” them is Veritus. “Veritas” is Latin for “truth”.

Filed under: BUYERS, INVESTORS, LENDERS, REALTORS, SELLERS , responsibility, transparency