Exotic Mortgage Brokers: The new boiler rooms
A recent cover story in Business Week on Nightmare Mortgages generated a lot of controversy, but never much clarity:
"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."
That sounds ominous, but it really doesn't do any justice to the apparent fools who bought these products:
"There was plenty more going on behind the scenes they didn't know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan's interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they'll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York's Ford Foundation. "It's going to kill all the people but leave the houses standing."
How did we go from a nation of fixed-rate loving mortgage holders to this sudden spike in toxic mortgage products? It turns out that hard pitching telemarketers, in the best boiler room fashion, have been jamming these products down the throat of unwary consumers. Consider the following discussion from our media shy denizen of Maine:
I am currently receiving about 3 of these calls per month. You? Okay. I am being offered various rates, all with a 1% handle. Most require you to go thru a voice menu if interested after hearing a recorded mini-pitch, so they’re no fun. But the ones that have piqued my interest are the ones where a hairball of a mortgage broker comes on the phone, live, calling you by your first name and immediately congratulating you on your stellar mortgage-payment record which, wouldn’t you know, has now qualified you to participate in his “program”.
A couple of weeks ago, I played along out of curiosity But when we got to discussing the rate, 1.2%, I believe, I asked him how or why he would want to lend money at that rate when FED funds were officially targeted at 5.25%. His response, “I don’t wanna’ talk about FED funds. This program is about interest rates.”, caused a loud guffaw and simultaneous hang-up from me. Sound familiar? I’ll bet.
But the best ever was the weasel that phoned me last week. The pitch started out the usual way, except he called me “Dawn”. Whatever. Right off the bat, he offered me an “opportunity to cut my monthly payments at least by half”. How? By signing up for the deal of a lifetime, a “1.7% FIXED mortgage”.
Me: “Fixed? What’s the term?
Him: “30 years.”
Me: “Okay. So this means that my payment is the same every month for 30 years?”
Him: “No. It resets after 5 years at 7.25%.”
Me: “So how is that a 30-yr. fixed if it resets in 5 years?”
Him: “Listen. This is a great program. I can cut your payments in half.”
Me: “I can’t understand how you can offer this with FED funds at 5.25%. Is a feature of this program something called negative amortization?”
Him: (Big pause because I think I caught him off guard with the mention of n.a.) “Yes.”
Me: “So this means that every month, my outstanding balance is growing, right? Why would I want to sign up for something that puts me further into the hole every 30 days?”
Him: “Don’t worry about that. Your real estate will continue to appreciate and take care of it.”
Me: “Let me ask you something. Since you can currently lend money to the US government and get nearly 5%, why on earth would you wanna’ lend me money for 1.7%?”
Him: “The banks don’t pay me to lend money to the US government.”
Nothing in the sales pitch except a promise to cut their payment in half with a fixed rate. Where is the disclosure of risk and fees? If this was any product regulated by the SEC, someone would be going to jail.
Hello? Anyone at home in the Treasury Department on this? Office of Banking Supervision? The Fed? These fraudulent sales pitches are a cancer eating away at an increasingly vulnerable part of the economy.
The sooner someone stops these weasels from doing their damage, the better off we will all be.
>
Source:
Nightmare Mortgages
Mara Der Hovanesian
Businessweek, SEPTEMBER 11, 2006
http://www.businessweek.com/magazine/content/06_37/b4000001.htm
Tuesday, September 12, 2006 | 08:38 AM | Permalink
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Comments
Barry,
You just stop the anti-American rhetoric right now.
These products are all about affordability and giving the average Joe access to the American Dream.
What kind of good American would be against others achieving the American Dream?
Without these products, these good Americans would not be able to afford homes, never able to ascend past the granite ceiling.
The wealthy have had access to the luxury of real estate appreciation and equity withdrawl for years. Now that everyone can afford real estate, the wealthy want to take it all back.
You just stop your fear mongering right now.
(sarcasm off)
Have you read some of the comments made to the Office of the Comptroller of the Currency regarding the curbing of risky lending practices? You'd be amazed at how many of them read like the above. Let me try to dig up the link, it's worth the time spent.
James
Posted by: James Bednar | Sep 12, 2006 7:37:02 AM
Comments in response to: Interagency Guidance on Nontraditional Mortgage Products
http://www.ots.treas.gov/CL.CFM?DON=73293&AN=1&catNumber=67
Posted by: James Bednar | Sep 12, 2006 7:47:25 AM
The just shut down 7 mortgage brokers here in MA for deceptive loan practices.
http://www.boston.com/news/local/massachusetts/articles/2006/09/09/7_mortgage_brokers_shut_down_by_state/
Posted by: The J Man | Sep 12, 2006 7:56:27 AM
wasn't our former fed chairman pushing ARM products some time ago?
Posted by: bill the barber | Sep 12, 2006 8:00:41 AM
There is nothing wrong with ARM products. Fact is, if you went 10 year fixed and I went ARM, both of us for the last 10 years...
who do you think would have paid less in interest?
I'd like to see a study that checks that out on 30 year windows, historically, and I bet the ARM guy always comes out ahead.
The problem isnt' ARM loans, the problem is people borrowing more money they should.
Posted by: blaze | Sep 12, 2006 8:31:14 AM
Per usual in this country, we forget tat markets need regulation even between crises. You can be sure there will be congressional hearings in a couple years where congressmen will be shocked! shocked! to learn what I've been reading about in newspapers for the past 2-3 years.
Luckily, our federal finances are so sound we can easily afford another bailout--not of the poor schmoes who lost their home, but the banks which enabled them, of course!
Posted by: Bob_in_MA | Sep 12, 2006 8:33:31 AM
Yes this will be "shocking" to our "law breakers, uh I mean makers, law makers" in a few years LOL . But I have seen print ads that talk about "fixed" mortgages that clearly are NOT, with ridiculous teaser rates to lure the unwary. This is worse than car dealers ads that bait and switch. It is false and misleading. Nuff sed, by me anyway.
Posted by: doh! | Sep 12, 2006 8:49:43 AM
In the book I read about the S&L crises, none other than the House Speaker was credited with keeping the door open for his Texas buddys for 4 or 5 years after everyone knew it was going to end badly.
Did he resign over an extra-affair or the 50 $Bil he cost taxpayers?
Posted by: tjofpa | Sep 12, 2006 9:08:08 AM
wasn't our former fed chairman pushing ARM products some time ago?
Posted by: bill the barber | Sep 12, 2006 8:00:41 AM
YES HE WAS, WHICH HAS ABSOLUTELY NOTHING TO DO WITH DECEPTIVE LOAN PRACTIVES OR EVEN "risky lending practices".
Posted by: Larry Nusbaum | Sep 12, 2006 9:13:01 AM
All it would take is an hour or less of a lawyer's time to go through the paperwork before people refinanced and tell them what a terrible deal these mortgages are. Unfortunately, people fret over paying a lawyer $150-200 when they're setting up a three or four hundred thousand loan (if not bigger).
My PSA for lawyers is now over.
Posted by: Royce | Sep 12, 2006 9:26:43 AM
Who is going to lose money from all of this? Will the borrowers be forced to pay back the loans for the rest of their lives? Will the banks be forced to take the loss? Will MBS holders actually lose money?
I wonder if people are going to try to bring a class action lawsuit against these people. If I was offered a 1.7% fixed rate 30 year mortgage, I would try to make the bank stick to those terms. There are states where recordings of phone calls are admissable in court even if only one side knew it was being recorded. If they offer you one thing on the phone and then send you paperwork for something else, it could count as fraud.
We need mortgage regulations that require payment schedules to be prominently displayed in the paperwork. There should be one for what the payments will be each year if interest rates stay where they are and one for what happens if interest rates hit the mortgage's rate caps all the time. Expecting people to understand the difference between different interest rate benchmarks is too much. Expecting them to understand a payment schedule will leave only the truly stupid stuck with loans they have no chance of managing (some people just can't be helped).
Posted by: jkw | Sep 12, 2006 9:57:11 AM
Barry maybe you are dead on for the practises in the East but in the Mid West your wrong. However I doubt they needed to scam anyone back East either. I have done many loans over the last 5 years. I even did one option package like you mentioned. The option package you mentioned the guy could have afforded to go fixed but he "insisted" that he go the other way against my advice. He was better off than most financially. The sales pitch (if you could call it that) was do you need help with your payments. From there you had a kling on attached to your leg that called you a couple times a day. No selling needed.
I'll tell you about the last loan I did. The man was 60 plus. Held 3 jobs one being the Town Treasurer another being a salesman with a company for over 20 years. His wife worked in health care. All respectable positions. His problem was (which seems to be everyones problem) he was overloaded in debt. Above that what shocked me was really how financial iliterate the guy and his wife were. They were no different than everyone else I dealt with it was just that he was the Town Treasurer as well. All I saw was people so overwhelmed with debt that all you tried to do was educate them and try to put them on a path out. To give them hope so to speak. It truly is sad how how I feel these people are being ripped off blind. But it is not from some boiler room Barry.
Posted by: Eric | Sep 12, 2006 10:06:13 AM
blaze: And guns don't kill people, people kill people, right?
Posted by: bostonian | Sep 12, 2006 10:38:19 AM
BR-
Most insidiously these boiler rooms are targeting their cancerous pitches at minorities, particularly African-Americans and Hispanics. Toxic debt taking away the American dream from a whole group of minorities, sounds like a hate crime to me.
Posted by: PW | Sep 12, 2006 10:52:24 AM
I've been watching this for a long time. All that I can say is that if I were the Dictator, I would have them all shot on the spot. Everyone that's involved in this racket, especialy those at the top, that should know better.
That poor salesman that was quoted in this story is probably carrying one of these neutron bombs himself. He's probaly living in a mini McMansion that was built on a toxic dump site and probably drives a late model, mid-rnage SUV. He's got a bitchy, cheating wife with fake tits who's trying to upgrade from Coach to LV and just went into hock buying a Hermes belt. He's probably got a kid that he loves as much as you and I love ours and he may really be a nice guy that's stuck in a bad place and he just doesn't know any better and can't get out.
However, as stated above, there are those that do know better, and they should all be beaten severely and then shot.
Posted by: albiegf13 | Sep 12, 2006 10:54:08 AM
Caveat Emptor?
Posted by: S | Sep 12, 2006 11:38:25 AM
Hi All,
Suppose the banks are successful in selling the new "Fixed" mortgage with negative amortization or some other such product. Suppose they can continue to obtain inflated appraisals to substantiate the loans. Does this seem plausible? Does the party continue? For how long??
No politician wants to put his name on any bill stopping the party, so the market itself has to implode (IMO). The longer that takes, the worse the scenario (Japan for expample).
Thanks for any information.
Posted by: Lama | Sep 12, 2006 11:40:07 AM
blaze, are you talking about the ten years to the present, 1996-2006, when you talk about the "last ten years"? Including the final seven years of a major bear market in long-term rates?
Posted by: David | Sep 12, 2006 12:04:58 PM
It'd be nice if the consumer would read a little before making the biggest financial decision of their life. The more the government "helps" consumers the less they'll have to learn. Underinformed consumers are not good IMO.
The "fools" who bought these products will learn their lesson. I still think we should teach financial literacy in High School. Don't let 'em graduate if they get scammed by the teacher. Though I'm sure the 13th century boats are helpful somehow.
Posted by: KirkH | Sep 12, 2006 12:08:42 PM
I'm a Canadian watching the whole mess unwind from HERE!
I went through the same thing in 1980 here in Calgary when the market dropped 25% in 6 mths. I had 3 mortgages on my 1st house and I was 21.
You can survive it.
Warning! We didn't have the internet then so this could go very quickly and very far.
Like my silver yesterday???
Posted by: calgarycanada | Sep 12, 2006 12:11:45 PM
I agree that products such as these should not be sold to the average borrower.
But you're leaving something very important out - there is a required disclosure that must be given to the borrower at the time of application (or mailed if it's a remote app), and definitely before any fee is paid, and no one's going to close without it in their files.
This is a sample of one of these disclosures. By law, it must disclose if there is negative amortization, and it must disclose the possible maximum payment and maximum interest rate.
You explain to me how lenders have signed copies of these in their files for these loans. I don't doubt that limited-English and illiterates are being scammed, but I have major questions about how an engineer or a police officer can manage to unknowingly close on such a loan. I don't believe half the examples given in these articles. I think they were just desperate and went ahead with it anyway.
If they didn't get these disclosures, they have a legal claim and can force the bank to settle with them. If they did, and now they are conveniently forgetting it, then they're showing the same amount of irresponsibility that got them into a financial hole in the first place.
Don't get me wrong. I think a huge number of brokers and quite a few loan officers should be out of business. But I'd really like to know how these people get into these loans without knowing that their interest rates can increase as they say they did. I am a skeptic.
And btw, I lost a customer (I do work for banks) by refusing to go ahead with a bad loan program for a bank. This isn't the type of thing I would ever agree to make money by participating in. These loans truly are toxic. The law is TILA. See
Reg Z 226.19. I agree with Eric above (and Royce).
Posted by: MaxedOutMama | Sep 12, 2006 1:13:06 PM
my only question, how do I survive or thrive in a another bailout situation and recession?
LT Bonds?
Posted by: critical thought | Sep 12, 2006 1:18:53 PM
Jkw,
Who will pay for all of this? My guess is taxpayers. People will default on loans, and the government will pay off the banks with tax money and china money. Though, I can always dream that these lenders will be left in the proverbial lurch..
Posted by: eli | Sep 12, 2006 1:32:04 PM
Calgarycanada,
I'm also interested in how the rapid flow of information will influence any of these potential panics (housing, stocks). Though, I'm not sure how much different the flow of information now is from back in 2000.
I guess we'll have to wait and see.
Posted by: eli | Sep 12, 2006 1:38:14 PM
How about shooting the fraudulent borrowers too. You know, the little-white-lie crowd: overstated incomes on no-docs, bogus employment verifications, speculators with owner-occupant loans. And while we're shooting people, lets get the appraisers, real estate agents, developers, city planners and inspectors. Who have I left out?
Posted by: fred hooper | Sep 12, 2006 1:44:00 PM
