I Don't Understand What's Happening

Posted: Aug 02, 2007 3:30 PM

Frustration abounds! I am surrendering. If you want to roll the dice and get yourself into a terrible financial situation be my guest. I have been cautioning borrowers for almost two decades and it seems there are more borrowers looking to commit financial "hari kari" then there were total borrowers years ago. Try this. Look at yourself to the mirror and try to figure out who is the recipient of all your "risky" thinking. That is at least a good start.

How old were you when you gave up on Santa Claus and the Tooth Fairy? What about Soylent Green? (Never mind, that's not important). When did you first realize that unbelievable car they were advertising was already sold? How about the big prize for the first 50 callers? Now you are getting the picture. Some people are always offering you things that do not seem to exist. According to my emails in the last month I have won every foreign lottery in the world, and at least 10 people want to give me their foreign fortune if I just send them my information. Those who offer you things that don't exist aren't always classical sales people, don't always reside in your neighborhood and if I had to take a guess probably don't look or sound much like you.

Now to the point. I have said to my wife more than a thousand times, "who would take the 1% mortgage"? I don't ask her anymore, not that question anyway. I now ask her "who wouldn't take that mortgage"? Everyday I receive, and that includes Saturday and Sunday, a plethora of emails all stating that they have that loan with the options and the real low payment and it's going up and their balance on their loan is also increasing . Can I help?

I am trying to guess what the loan officer (?) could have told you that would ever make you want to take that loan. I once had a loan like that years before I got into the business but instead of raising the balance yearly, they extended the term. When it got to the point that at age 35 it didn't look like I could outlive this loan I knew something was wrong. I quickly got out of it and took my lumps.

A lot of you are smiling and saying you were too wise to take that loan (thankfully) but instead you took a 5 year arm fixed at 3% and all of a sudden your balance is going up.

How could that happen? In 2003 I actually put out a true 5 year arm at 3.875%, which in that case was the interest rate and the payment rate. The one you took is the payment rate and the interest rate, you figured out later, was much higher (6.75% to 8%). What I don't understand is why you didn't multiply 3% times the loan amount $450,000 which would give you a monthly payment of $1125 (after you divided the answer by 12 months) and realize something was up when your payment was $600 or $700 a month. I do realize that some people understood and figured the growth in real estate in their area would take care of the fact that the balance was going up. Good point, and I really am not talking to you!

Now for the new scam. Take a home equity line of credit and put all of your money each month into the Heloc, pay your bills and put the balance into your current loan and you will pay it off, in say 12 years, 14 years 17year and 3 months. You are told you need a good cash flow to make this work. I think they forgot to tell you that you also have to be able to make an elephant disappear on national TV., but again I digress. I got an email from a borrower who traded in their 4.875%, 3/1 arm (actual interest rate) on 80% of the value of their house and an equity line in the high 8% range for 20% of the value of their house.

They took a Heloc for 8.31% on $357,000 and I calculate they are losing 2.06% each month based on a true 7 year arm at 6.25% on that amount which is $612.85 a month. They were told if they did it right they would pay off their house in 12 years! They can't get passed interest only.

One question: How do you make money by taking a loan in the 8% range to help you pay off a loan in the 6% range, or even lower? I lied, I have a second question. If you have a really good cash flow why wouldn't you just pay additional on the mortgage and skip the exercise with the Heloc?

Now to add insult to injury someone is selling the soft ware to help you time your Heloc withdrawals to get maximum benefit. I believe the cost of the soft ware is $3000 or so.

Which gets me back to the beginning. Do you know anyone in the mortgage industry, banking industry or just wealthy and did you ever ask them about this? If they weren't in on this wouldn't that have given you some second thoughts?

The option arm has been around for years, the Heloc gimmick is relatively new. There are many more schemes out there and I can assure you that there always will be enough of these around to wet your appetite, make you hopeful you will soon be wealthy and sink you faster than a leaky row boat. Take my advice, play the lottery. You will have a better chance.

Writers note: I have made light of these happenings but not because I think they are funny.

In reality I am disgusted at my industry, the heartless b***tards who take advantage of people and the messes I see on a daily basis that I am asked to help clean up. Unfortunately it isn't always that easy or even possible. But we will try and help as best as we can.