My thinking; For better or worse

Posted: Jan 18, 2007 8:20 AM

I have seen this slogan in action too many times in my field of work, the mortgage industry, to allow anyone else to fall prey to what is so often simple errors of judgment made by some of my clients. I am going to expose these little mistakes made by some so you can learn from them without having to make them yourselves.

I had a couple as clients for years that carried a balance of approx. $100,000 in credit cards.

Every time they refinanced, I insisted they pay some of them off and the husband always refused except to allow the pay off about $5000 of the debt. They had the equity to do it and the monthly savings as a result would have been unbelievable--still he refused. One day, he confided in me that if he paid off the credit cards, he was afraid his wife would run them up again. I informed him that his analysis was incorrect because with the huge interest they were paying on their credit cards, he was running them up again himself. I did, of course, never convince him and to my knowledge, they still are carrying their $100,000 in credit cards.

Mortgage insurance is required when your loan to value is greater than 80%. It is paid for by the borrower for the benefit of the lender in case of default thus guaranteeing that the lender is insured for the portion over 80%. Several stories come to mind. The first is a couple who bought a house with a small amount down and was forced to take out mortgage insurance. After several years, they had sufficient equity to rid themselves of the insurance but instead took out a second mortgage to get some cash. They never informed the mortgage insurance company they had more than 20% equity and so they were paying on a first, on the now unnecessary mortgage insurance, and on the new second mortgage as well. The mortgage insurance company will not automatically cancel the insurance unless you inform them, and then they still might refuse until you get them an appraisal showing the equity. I refinanced the entire amount and cancelled the mortgage insurance.

The second instance was a young couple who came to me with a new purchase they wanted to refinance. They had a first and second mortgage that equaled 100% as they bought the house with nothing down. The use of a first and a second negates the need for mortgage insurance. They also were issued a policy of mortgage insurance and were charged a monthly amount for the premium. I still cannot figure out how that could possibly be done. My only conclusion is the lender is acting as a mortgage insurance company and collecting the premium. We are just beginning the refinance, and I probably will be able to get to the bottom of this mystery--I'll let you know when I have the answer.

In the last few years, I have run across at least a half dozen people who carry a collection or past due on an account that they say wasn't theirs. I believe them but that doesn't help the situation. They steadfastly refuse to include the payment for this account in their refinance and won't even let me pay it. Why? Because they are innocent victims of the scoundrel who wrongly added this to their credit report. They completely discount the fact that over the past years, they have paid it off several times in the higher interest they pay because their credit scores have been lowered by that delinquent account. Even after my explanation, they aren't moved. I am still trying on several of these.

Did you know that when you go bankrupt your debts that were wiped out can come back to haunt you? It seems that some of the more daring credit card companies will report your account as delinquent and keep the balance (the one that was wiped out) on your report unless you take the proper action to send your bankruptcy papers to the credit bureaus. I am positive that a great many of these accounts are paid off through a refinance just to get them off the borrowers credit report. Without taking a position on this, I will state that if you go through the time and expense to file bankruptcy you should get your money's worth and not have to do what you went to court to avoid. Be alert and protect yourself.

I have also found over the years that "friends" doing business with "friends" can at times not be the best way to go in the loan business or any business for that matter. I have seen so many borrowers sliced and diced by their own friends or friends of friends that I sometimes feel that no one should deal with anyone they know personally when it comes to business. The worst dissection I ever was involved with was a businessman who needed to get some cash out of his house to increase the inventory for his business. It was a large loan, and we were able to get this borrower an excellent rate on a five year arm and give him the cash he needed. After all the preliminaries were done, I never could reach him again. My rate was more than competitive and was without any points.

Several weeks later, an attorney down the hall from my office came in and asked me to speak with one of his clients who may have gotten himself into a mess on a loan. You guessed it; the business man I had been dealing with earlier. A family friend had met him and told him he could give him a better loan so he trusted him and agreed to take his loan. The closing costs included points, the loan included negative amortization, and he didn't even get as much cash as I offered. It was too late to stop it as he needed the money immediately, and I couldn't get it down for a few weeks as I had cancelled his loan. I will never forget the look on his face when I explained what he had opted for and what he had given up.

Prepayment penalties are the most onerous problem I usually have to face. They are often used by sub-prime lenders. Sometimes, they are used by prime lenders in cases where the rebate is large and the lender doesn't want the loan paid off quickly or they lose the amount they paid in commission rebate to the loan originator. Prepayment penalties aren't inherently bad, even if you can't sell or refinance for three years without paying the penalty. Five or six years ago, a sub-prime lender made an error and let me originate 30 year fixed jumbo's to $1,000,000 for primary or second homes at a rate that was at least 1/4% under the market. The loan had a three year prepayment penalty, but nevertheless, I was able to put out $20,000,000 worth of that loan in three days. The reason I was able to accomplish that was because rates at that time had never been that low, 6.5% without points, in at least 30 years, if ever. After three days, the lender realized their mistake but let me keep the loans I had originated.

Within about 18 months, the rates dropped dramatically, and almost everyone of those loans were refinanced and the prepayment penalty was paid. The lender came out okay, the borrowers never uttered a peep, and that chapter was closed. It never was that easy from any standpoint after that time, and I did have a couple clients who have assured me that they were not aware of the prepayment penalty. Although they all had a packet of loan documents with their signature on the prepayment rider, and the savings they created for themselves in most cases outweighed the prepayment penalty, these particular clients were not very happy about the penalty assessed. When there is a prepayment penalty involved, I always bring it into their awareness from the outset of the process.

Moral of the story--always ask if there is a prepayment penalty on the loan and make sure you understand the implications. In many cases, it can make sense to take it if the rate you get because of it is low enough and you know you will not be moving from the loan during the span of penalty. Even if you do end up having the penalty assessed, it can still make sense to pay it if the benefits prior to the assessment outweigh the penalty.

I could go on and on but I think you get the picture. As always, I beg you to read and ask questions. You should always check with a trusted adviser before making any important decision, but especially when it comes to your money. The extra time you spend in analysis of the situation can give you not only peace of mind but also save you some financial heartaches.