Hi Sparksals,

This is leading states to implement more stringent laws about adjustable rate mortgages and other creative financing.

This is the most ludicrous part of it... none of these problems are due to a LACK of laws & regulations, they are due to two significant problems;

A) A lack of enforcement of the laws & regulations ALREADY in place (adding more unenforced won't accomplish squat... except to raise our taxes further to be wasted, and increase financing costs due to compliance overhead...) and,
B) Consumers continuing to treat their mortgage financing as a product shopping transaction, instead of an ongoing family financial management process.

Until those two issues shift, nothing else will change.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

You're right, Dave. Unless someone is financially savvy and responsible, the creative financing options are asking for huge trouble.

I heartily agree to both points!

So often the laws already exists and are not enforced or the punishment is so minor it does not deter. If they want to do something they need to enforce the laws that already exist and make the punishments harsh enough that companies will not break the law.

So many people spend their money irresponsibly and are spending more than they make. Surprisingly many of these people are making a good living but they buy what they want instead of what they need. They put no money aside for emergencies or retirement. I tell my tax clients that the most important thing they can teach their child is how to handle money responsibly. It doesn't matter how much money they make if they don't learn to handle money responsibly they will never have anything. It should be mandatory that every high school student has to learn the basics about finances (living on a budget, filling out a job application, filing a tax return, applying for a mortgage, insurance, retirement savings, etc).

The article actually says that the current laws are being used to sue the lenders:

'Accusing Ameriquest of deceit and negligent misrepresentation, among other charges, the couple sued the lender, saying its salesman failed to provide documents and disclosures on the loan required by state and federal law.

Across the nation, anger and litigation are growing against the tactics of subprime lenders, who offer easy credit for homes that are turning out to be too expensive for millions of Americans now that mortgage rates are going up.

The couple won a first round this month when a Massachusetts judge ordered Ameriquest to halt a $715 monthly increase kicking in from their March payment and refrain from repossessing their property until the lawsuit is resolved.

"I would expect more lawsuits like this," said Boston University law professor Tamar Frankel.'
.....

There is no new laws being suggested , just guidelines.

......

always best to read the article.

I also think that some people continue to live above their means. When I did loan processing previously, I would see so many people who just had to have a large house, and would go into debt or borrow (gifted) money from Aunt Bessie, Cousin Sue, etc. just to get into the house they wanted.

When the refinancing boom was around, I would have to take the application and it was amazing to me that people who could barely make a mortgage payment went out and bought on credit the newest, most expensive car, the finest jewelry, etc. They would have 2 lates on the mortgage, but darn if they weren't driving a brand new BMW or Mercedes. The debts were unbelieveable. No wonder they were struggling.

Of course there are unscrupulous lenders out there, but like the one lady in the article, I don't think being asthmatic makes one unable to read to the fine print which she admitted she didn't do. Why don't people ask? When I got my arm previously, I made sure to ask what my highest payments would be and when that would happen.

"I don't think being asthmatic makes one unable to read to the fine print which she admitted she didn't do. Why don't people ask?"

The answer is that there are many people who are not rational and let emotions take over and that the norm of a real estate transaction isn't the ideal case where an attorney explains every line in the contract to the customer. The idea behind regulatory laws is that all parties to the contract have to act in good faith. If the lender, who should be rational because the lender is the professional, promises the moon and sky and hides the nasty in 2-pt fine print, a case can be made that the lender was less than forthcoming.

I know this outrages the people who put "personal responsibility" on a pedestal but it is utopia to believe that everybody is just a sober, rational, responsible person. Some predatory lenders know this very well and exploit that.
Some say "tough luck - this is your own fault" and some say "the lender should bear some responsibility, too". Just another case of ideological differences.

And even, if you are of the "tough luck" kind: I am sure you have, at some point in your life, signed a contract without reading and understanding everything that is in the fine print. Like in a check out lane when you are asked to sign a 10-page fine print extended warranty or whatever with 10 people waiting behind you.

When I signed the closing papers for my last (already paid off) mortgage, I did my best to read the whole 30+ page legalese that was put in front of me at the time of closing (and no, they were not able to supply ALL documents a week ahead) with both the closing agent and the realtor sitting next to me not even trying to hide them becoming more and more impatient because it took me about 2 hours to read everything and I am sure that I didn't interpret all the legalese correctly.

With all of this "reading of documents" I'm wondering how many deals are actually closed without legal representation for the borrower/buyer. In some areas the borrower is required to pay for the lender's legal representation. Supposedly the lawyer is also looking out for the borrower's interest. So, I wonder how many borrowers/buyers are actually represented and have the fine print explained to them.
I was involved in a proposed condo conversion project recently and all 32 owners who signed the purchase and sales did so without sny legal advice. It's amazing to me how people will skimp in this regard.
In states where title companies handle the closing, the buyers seem to think that the title company is their legal help, while in fact, most title companies don't have lawyers on the immediate staff. I purchased a property from a gentleman years ago...commercial property of 1+M $ and he kept referring to the title agent as his lawyer. The agent kept telling him that he was not a lawyer. The seller concluded the deal and never had any legal representation.

I may be asking a stupid question here, I'm not the best at financial matters -- but how are the subprime lenders making money if the homes they are offering mortgages on are eventually foreclosed on, presumably with the borrowers owing thousands of dollars in back payments.

My son and his fiancee just put an offer in on a foreclosure. The previous owner paid $179,000 for the home 3 years ago. It was foreclosed on with a balance of $157,000 being owed, $11,000 of that was in back payments. The bank accepted my son's offer of $152,000 -- where are they making their money?

I think part of the problem is the fact that people feel uncomfortable sitting at closing reading every single document, like jrldh suggested. I admit, I haven't read every single document I signed for a home purchase, but I did skim and ask certain questions.

In terms of the loan, I did my research ahead of time to learn as much as I could. However, we never needed creative financing options because we always got a 30 year fixed.

I think alot of these people were taken advantage of, didn't read the fine print (for which it is their fault) and didn't understand the loan. The more creative you get in the financing, the more complicated it is and there is room for misunderstanding. I also agree the woman with asthma does not have an excuse for not understanding her loan. At the same time, it sounds like the mortgage broker didn't explain to her the ramifications of her creative financing, but then again, did she ask? Probably not.

I believe the mortgage broker makes their money on the commission on the sale of the mortgage. They may not always be the lender, so once the mortgage is activated, they are in the clear.

"And even, if you are of the "tough luck" kind: I am sure you have, at some point in your life, signed a contract without reading and understanding everything that is in the fine print."

I read every line or I do not sign. PERIOD.
If you do not understand what a contract is, do not sign them.

I have a very limnited ammount of sympathy for folks who stretch to get the house, the boat, the new car, etc.
They get exactly what they deserve when they cannot manage their OWN finances.
Maybe we should have an official 'nanny rule' that says contracts are only valid if you decide you like them after the fact.
That might protect the ignorant.

Hi brickeyee,

I have a very limnited ammount of sympathy for folks who stretch to get the house, the boat, the new car, etc.
They get exactly what they deserve when they cannot manage their OWN finances.

Oh baby, you've said a mouthfull!!!

Realize... out of the 30+ some pages in the PRELIMINARY loan application package I have to send out & get signed... and the following 20+ some page 'compliance packet' the wholesale lender(s... in the case I shop more than one for my clients) have to send out... and the subsequent 30+ some page FINAL document package at the signing table...

ALL but maybe 6-7 pages are completely due to legal ass-covering required by lawyers for those who can't seem to comprehend contractual agreements.

At some point (a point we've passed long ago, I propose) it becomes a silly game of killing trees. The people all these disclosures and disclaimers and warnings are supposed to protect (because they're not held to be mature enough to be responsible for themselves) are the very folks most likely to rush past and IGNORE all the 'red tape.'

Either you are an adult, financially, or you are not. There are as many scammer consumers (likely more) as there are scammer vendors, and the cost burdens of treating some as financial children unfortunately shoulders to those more responsible, and not deserving of the punishment.

It just gets sillier & sillier...

Dave Donhoff
Strategic Equity & Mortgage Planner

"I may be asking a stupid question here, I'm not the best at financial matters -- but how are the sub-prime lenders making money if the homes they are offering mortgages on are eventually foreclosed on, presumably with the borrowers owing thousands of dollars in back payments. "

Great question. Without getting overly complex or verbose, I will try to explain.

Most lenders do not hold the loans they write for the life of the loan. Instead what they do to get liquidity to be able to write more loans, they package the mortgages together into pools by risk and other factors and then resell them based on these factors to investor groups such as hedge funds, money managers, etc. Usually the bank transfers most of the risk of default to the investors. In most cases the bank still remains as the administrator of the mortgage, so who you write your check to does not change. What the bank gets paid depends on the credit quality of the pool (risk factor) and the interest rate.

To entice investors to buy the sub-prime loans the banks have to make sure they build more profit into the loans to offset the increased risk assumed by the investors. This means higher interest rates or prime+ variable rates that maintain the spread between prime and sub-prime loans. Once the loan is sold, the bank really has no control over changing the terms of the loan, even if it means preventing foreclosure.

What makes matters even worse, is as borrowers begin to default en masse, investors want more spread to assume the risk which makes it impossible for sub-prime lenders to write profitable loans, which in turn means they have no money to lend. Thus the melt down.

No-one wants a loan failure, especially the sub-prime lender, however, its inevitable given the group they are lending to and the terms of these loans.

The bottom line is that people need to be a little smarter when borrowing money. If you are on a tight budget, the last thing you want is a variable rate loan. I think most people that signed up for these exotic loans, based their decision on the fact that if they ran into trouble they could just flip the house and move on with a tidy profit.

Dave,
So far three of the 'I tried to flip' prperties a very good prices.
The bank took a bath on two and the borower on the third.

I am just one of those 'old fashined' types who plunks 20% (or more) down and can ride a long time sonce the payments are low enough to be covered by the rent.

But us old types are just dumb.
Why use your own money?

Cause when the market slows we can afford to carry.

I actuially stay away fron the brand new houses since there is often little that can be done to reverse the slide.
Something that needs a moderate amount of work to really turn out nice is a real money maker.
I grab the ones that the other folks avoid since they are hiring out for all the work.
What costs them thousands in plumbing and electrical (let alone an occasional structural problem) is easy money when you know what needs to be done and have a good team of employees to do the work.

Slightly OT but what I find incredible is the appraisal process. We are closing on a house next week that appraised $175,000 lower by our relatively conservative bank (for purposes of our mortage) than it did for the sellers subprime bank loan refinance where it appraised at $175,000 higher than our appraisal. The two appraisals were only done a few months apart and virtually nothing changed with the house or the property in that time period. Additionally, one of the realtors involved commented to me that in his upteen years of real estate he had almost never had an appraisal come in too far off from the purchase price. What am I missing in this picture - are appraisers just looking to "hit a number"?! Dave, your thoughts??

Here's the thing--many of the people signing up for these subprime loans are under-educated. I had trouble understanding everything in the papers I had to sign when we bought our house--and I'm used to reading legal gobbledygook and making sense of it.

Everyone in the financial industry--not just subprime lenders, but banks and everyone--hides behind incomprehensible language in tiny type in multi-page contracts. They count on the fact that most Americans will be too intimidated to read through it, and if they do, they won't understand. This practice has to stop. Allowing people with little money to be misled into unwise financial arrangements helps no one (except whoever's collecting the fees). You can declaim about personal responsibility all you want, but the fact is that many Americans never have any financial education; manage to graduate school without learning to think critically or read and comprehend complex prose; and are bombarded everywhere they go with advertisements that are developed by very bright people who spend a lot of money figuring out how to use psychology to manipulate. And what are advertisers trying to manipulate us to do? Spend all our money, of course. I can count on one hand the number of times I've been influenced by advertising, but then I'm weird. And cynical. And every time I have been influenced to buy something, I've quickly realized that it was junk and whatever I expected it to do, it didn't do. Which makes me tend to respond to ads even less. I see an ad and think, 'wouldn't it be nice if that were actually true?' I just assume they're lying. But most people don't. When someone tells them something, they believe it.

Bottom line--contracts need to be written in plain English, using words that the people signing them can understand.

Hi trying2buy,

What am I missing in this picture - are appraisers just looking to "hit a number"?! Dave, your thoughts??

Appraisers are hired to generate an analytical report to reduce or eliminate the chance of fraudulent valuation by the buying & selling parties. Real Estate appraisers are NOT actually hired to nail a precise fair market purchase price. This is a very important distinction.

Appraisers have to determine a value for an asset which usually has no identical comparables, and in many cases the comparables that are relatively similar are stretched out as having closed across a period of time that is affected by different demand cycles (summer/buying season versus winter/dead season, etc.)

It is the selection of, and the availability of, the appropriate comparable properties that makes the biggest variance between different appraisals. A one month difference in time of appraisal can make a HUGE difference in whether a new comparable gets closed that dramatically raises or drops the report value... or another comparable falls out of significance because it grows too far back in time.

So... as you can see... there are a LOT of factors that can affect an appraisal value, ultimately. In the higher range of properties, appraisal can wave high & low wildly, because there is much less liquidity (less frequent sales) and the lack of competitive frequency makes the emotional negotiated highs & lows much wider.

Hope that helps,
Dave Donhoff
Strategic Equity & Mortgage Planner

Hi housenewbie,

Everyone in the financial industry--not just subprime lenders, but banks and everyone--hides behind incomprehensible language in tiny type in multi-page contracts. They count on the fact that most Americans will be too intimidated to read through it, and if they do, they won't understand. This practice has to stop.

You're complaining about the wrong parties. If you want to reduce the multi-page legales, attack the government. Only because of regulators are the paperwork requirements so complex, confusing, and ominous.

ALL of the mortgage terms (every single detail that matters) is in typically 14 - 16 point text on a TWO (just 2!) page "NOTE."

Blame the rest on the nanny state.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

It's fine to say "Buyer beware" and excuse all fraud in this country. But these unscrupulous people target those who are least likely to have the ability to beware.

My mother was a very competent person, but after her death, we found that she had been the victim of a predatory loan with a subprime lender. I pieced the information toghether later. Began with a telephone solicitation -- she needed some home repairs -- the guy came to the house -- was a notary -- she ended up with a second mortgage which my lawyer (much later having read the paperwork) said was playing fast & loose with state lending laws. Should she have read everything & consulted an attorney. Of course. She got duped. Did she deserve to possibly lose her home. I don't think so.
Susan

goodness, it sounds like some would have us believe the mortgage industry is full of saints, and its' all the customers and govt fault.

LOL...
sure.

the nice mortgage lenders only want what is best for you, they'd never scam or do anything wrong, and if it happens its the customers fault.
unbelievable.

I think what is being said is that each is party is responsible for their own actions. Sometimes the problem is the lender, sometimes the borrower, then of course our protective government gets in there too.
Too often it is a little of everyone.
Blaming just the lender, doesn't addresss the problem of the borrower.
Knowing that lenders are in business to make money, they do not only want what is best for the borrower is the beginning of being a smart consumer. It is a business transaction.
If an adult cannot read or understand a contract they should not sign it. If some consumers were defrauded, the lender is chargeable, but signing an agreement, then saying you didn't understand it, therefore should not be held responsible is well, irresponsible. Our society is actually quite forgiving of peoples mistakes, but here we have people saying they didn't make a mistake its the other guy's fault, Sounds like my kids fighting.
We have nonrecourse loans, quite forgiving, we have bankruptcy, forgiving again. I'm thinking non recourse varies by state. But when I hear people mad that their loan payment skyrocketed when the terms were explained to them, they signed their agreement to those terms. Well, I can understand being mad, but saying they are not now responsible for those payments because they are the victim of the lender, that is when I lose sympathy.
Again, I do fault the lender that does give required disclosure, but I'm reading about the other victim's that just don't have the income or equity to deal with the increased payment. Move on, but don't blame everyone else.
Yes, we should take responsibilty for our actions, I've made plenty of mistakes in my life, but I only blame myself not others. Heavens, no one is putting these people in front of a firing squad for their poor decisions.

The world today is Darwinism at it's finest...."Survival of the Fittest." But, in today's world it is a question of how fit is your brain and not your back.
People with no financial sense or with little self control over buying what they can afford, get taken advantage of all the time and it's not just house buying. Look at cars and the trade ins, the leases, discounts, no interest and it goes on and on. I would bet that 90% of the population buys a car thinking they are getting good deal when they could be doing better. I am amazed when I look at people in restaurants. Half the people look like they should be spending money on something other than restaurant food.
Our economy would be in pretty rough shape if everyone knew how to manage their money:-)

housenewbie:
Bottom line--contracts need to be written in plain English, using words that the people signing them can understand.
==============

The Provincial govt in Alberta enacted this very law for contracts. I don't know if it extended to mortgages, but basically, all consumer contracts, be it one with a roofing company, bank, etc., had to be written in plain english so the person signing can understand. There were so many people duped because of extreme legalese on a simple home repair contract.

"...little self control over buying what they can afford..."

These are probably the same folks who think that a free lunch is just around the corner.
Using highly leveraged loan products outside the mainstream REQUIRES the borrower to understand what they are getting into.
I use them once in a while. I understand the risk.
My principal residence has a plain Jane jumbo mortgage, and even that is a little outside.

There are plenty of government programs like FHA that are designed for borrowers that have little cash but need a place to live.

These folks think that the various programs are a source of easy cash.
When you are high risk, lenders are tight on enforcing terms.
Being late on a payment is a huge red flag, and they tale quick action to protect themselves from any further losses.

Is predatory lending out there? Yes.
Are there stupid greedy people out there? Yes.

"Bottom line--contracts need to be written in plain English, using words that the people signing them can understand."

But I still maintain that they are, I guess we will disagree about that.
Some of the "victims" said they didn't even attempt to read all the pages, whose fault is that?
I've gotten many mortgages, in California, all the terms are clearly printed in plain English.

Dave, your explanation does help - I am supposed to get a copy of the other appraisal tomorrow and will check if the houses used to compared are different.

I think the problem is three-fold:

1) People do not ask the right questions. When does the rate adjust? What index is the adjustment based on? How much can it increase at the first jump? What is the cap on the rate? Is there a prepayment penalty on this loan?

2) Misplaced trust. People assume that since the mortgage broker has all of their financial information and in most cases is approving them for the maximum amount they can afford, they would not offer them a product that is beyond their means. In other words, if they know I can only afford the $800/month mortgage payment, they wouldnÂt sell me a product that is going to increase to $1600 in two years, now would they?Â

3) Excitement. First-time homebuyers not only donÂt know what questions to ask about their loan, they are excited about the prospect of owing a home and this can sometimes blind you to the finance aspect. They may not realize all the expenses involved in home ownership (insurance, taxes that increase based on new sale price, upkeep and maintenance, etc.) and may overestimate the income tax benefits. If they do understand that their ARM may adjust in the future, they assume (and are sometimes told this by the broker) that they can just refinance (not realizing that this involves several thousand dollars in closing costs, fees, and possibly a pre-payment penalty and a possible increase in their insurance payment to cover the increased loan IF there is sufficient equity in the house to refinance in the first place without cash out of pocket). Because they are inexperienced, they may also assume that their home will earn more equity than it actually does and can sell for a tidy profit or that they will be making more money in two-three years (doesnÂt everybody) and will be able to handle the increased payments.

This does not mean that there are not predatory lenders out there. When my first broker sold me an ARM and I expressed my concern, I was told that after two years, I would have a conversion option to convert the loan to a fixed rate. Yes, this was true - but at 10%. No thanks.

See link to full article below: "Warning this Mess will only get Worse"

Excerpt:

"...Bubbles have a way of masking what would otherwise be self-evident truths. And, as the credit bubble in real estate dies a dramatic, not-pretty death, a very simple truth has resurfaced: It's not a viable business when you lend money to people you know can't pay it back..."

Here is a link that might be useful: Complete Article: Warning. This Mess Will Only Get Worse

"But I still maintain that they are, I guess we will disagree about that."

Well I'd have to disagree with you about that. And I'm a lawyer and much more comfortable with contract language than most people. I don't at all enjoy reading through the real estate contracts I've personally been involved with and I pity the average person without legal training who encounters one, especially for the first time.

There has been a Plain English movement afoot in some legal circle for many years and part of their reform efforts have been directed to real estate contracts, but they've met with only limited success in getting the industry to adopt their clarity standards

I heard a radio commentator yesterday compare mortgage brokers to used car salesman. Unfortunately, this segamnet of the industry doesn't regulate itself, so there are many brokers who are more interested in selling whatever mortgage is available to as many customers as possible. Some of them go to the extent of misrepresenting the terms of the mortgage or even committing fraud by mistating the borrowers' incomes.

Combine this with a change in the way mortgages are bought and sold which started back in the 1980s. Mortgages used to be bought and sold individually, which made the buyers fussy about what they were buying and the sellers careful about the soundness of the mortgages they sold. This tended to keep borrower qualifications high and restricted the number of people who could get a mortgage.

Then, the industry moved to selling mortgages in "bundles," many of high quality but it was also possible for the sellers to put some stinkers into the bundle. That meant that borrowing standards were loosened, which allowed questionable applicants to get mortages who couldn't before. So the subprime market gradually emerged. It's good, in a lot of ways, that more people can qualify for mortgages, but it also means that in a declining market like today, there are inevitably going to be a lot of foreclosures.

And that's bad for everyone, not just the defaulting borrowers, but also for those who hold stock in the companies that bought these shaky mortgages, and also for the economy overall.

"People do not ask the right questions. When does the rate adjust? What index is the adjustment based on? How much can it increase at the first jump? What is the cap on the rate? Is there a prepayment penalty on this loan?"

These terms are specified in the loan agreement.

Cmarlin,
You are not only correct... but the loan agreement (titled the "NOTE"... can't be missed) is probably the simplest, LEAST confusing document on the forklift!

Dave Donhoff
Strategic Equity & Mortgage Planner