A recent post here started me leaving a comment.
Quickly the size of my comment became the size of a post. So now it's a post! Not wanting to point fingers, I'll leave the link to the original post commented out and just offer this up as just good information. I'll also warn you now, I may have a strong feeling about this. ;)
Remember the Bruce Cockburn song entitled "If I had a Rocket Launcher"
I work in a large office building. In our building there is a mortgage company that hires extremely un-qualified loan officers, as many as they can. They do not have desks, they are outside sales people.
They get them in, they hype them up, they give them scripts, and then they unleash them to the world like a swarm of bad door to door salesmen.
They train them on two, and only two loan programs.
Want to guess which ones?
That's right! The Payment Option Arm and this Mortgage Accelerator Program.
They are trained on what to say and how to say it.
They are NOT trained and do not understand the features of the loan, or how to be a LO in the first place.
They are really birdogging - that's all.
They'll start conversations with everyone. In the elevators, in the cafe, in the lobby.
The conversations all start the same, "have you heard about this new loan program, I'm sooooo excited!..."
I can't tell you how many people in the building really shun them.
They also all say that they have signed up all their Friends, Family and Co-workers!
If everyone's doing it, it must be a good thing, eh? My grandmother would have then pinched my cheek and said, "If everyone jumped off a cliff would you too?" What? yours too?
But hey that's sales - and if that's the business model the company chooses to use - so be it.
I won't go into the how when I ask insightful questions of this new program - they don't have a clue what I'm asking.
My problem is in the facts.
No matter what this loan is titled, "The Super De Duper Payoff Your Mortgage in 8 Years Program"...
This loan is an ARM, this loan is a HELOC, this loan is a Hybrid.
I've seen it reported as a HELOC on Steroids. Come on, give me a break! And besides look what they did to Pro Athletes!
So tell me what caps are there?
What's the Index? The Margin?
Does this loan have to be paid off in 30 years?
Does it recast? Does it reset?
This loan is quickly becoming one of the new HOT marketing products in the business.
Will it be the POA of 2007? Too soon to tell.
The charts and figures rely on the fact that the consumer will continue consuming in the same manner or less.
Yet we all know that as a group, consumers will, when given access to money at reasonable rates, tend to use that money.
So the loan balance may go up not down.
That's just human nature. Knowing that's human nature, are they not lying with their projections?
Looking at POA people as an example.
It's true that if you took the extra cash you might have spent on a traditional 30 year fixed and invested in stocks, bonds and the like you will be light years ahead down the road (net worth wise).
Some people who have POA's were sold on that premise. Others were sold on the minimum payment.
Virtually none were shown what happens when the loan recasts.
None were shown that their loan may recast in as soon as 3 years or less.
None were shown how their minimum payment would double or even triple!
http://www.patagoniafinance.com/poa
Industry figures maintain that a full 75% of those people with a POA (NegAm loan) consistently make only the minimum payment.
Now with all those Neg Am payments out there and all that extra cash floating around you might expect to see savings and investment rates at all time highs.
Conversely, those savings rates are at all time lows!
Put everyone in this glorified HELOC program, let them spend what they want, or paydown what they want and you tell me what's going to happen when the loan needs to re-amortize.
This program isn't all that new, I did a quick search and found an article in my paper from back in May 2005 warning of it's pitfalls.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2005/05/26/BUG95CULR51.DTL&type=business
From the Article:
People who continuously spend more than they earn will keep adding to the principal and their mortgage will end up like a negative amortization loan.
Joyce Franklin, a financial planner with JLFranklin Wealth Planning, says "a borrower with financial discipline who wanted to pay down principal could do so on her own, without a fancy product" that charges a premium rate.
Any good financial planner will tell you to keep a mortgage on your primary residence for as long as you can.Additionally, paying off your mortgage early is dead money.
I'd explain further on that thought but it's another posts worth.
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Brian Brady is alive.... Mike... I agree...... And World Savings has actually been around since the late 60's, but made the neg am loan available around 1994? If I can remember correctly, while being lazy and not look it up.
What would get me stirred up is how they are going out and selling it. As Brian stated, just a different business model. And don't let their business model make you think any differently that this is a very bad program. As a lot of the loan officer's in the business, they have them. And I am not talking about the newbies. I am talking about the experienced, those that make beyond the low end of 6 figures. And nobody has to tell me that you can be new and make 6 figures and not know what you are doing. I have seen it, it's called pure luck...not skill. I know someone that made an extra $100,000 2 years ago, just because of 5 loans that totaled over 15 million in mortgages.
Hey, I remember that!
Thanks for the reminder Brian.
One of my problems is that the snake oil is being sold to decent respectable people who look to mortgage professionals for their expert guidance.
Salesmanship aside, I can expect to go to the car dealership and have a salesperson "sell" me on a new car.
No matter how inexperienced that salesperson may be, no matter how much mis-information he feeds me, the car I buy isn't nearly as financially devastating as a wrong home loan.
It may have a recall, it may have a defect, but it also comes with a warranty from a reputable company that stands behind it's product.
Lenders don't offer a warranty on their loans, and they don't stand behind their products.
They are in the business of lending money.
The inexperienced and unscrupulous salespeople in our business drag down our reputation as a whole.
Would love to see our mortgage paid in full - however - as tempting as that would be, credit cards must come first!
I wrote about this last week I think... Anyway, I think the Pay Option ARM is the worst product on the market. But don't blame the mortgage brokers! The big banks are pushing the heck out of these loans and our clients are begging for them.
I've actually lost clients because I've tried to talk them out of this program. Now, people call and ask for it and I *very gently* tell them why it's a terrible mortgage...some listen, some hang up and go elsewhere.
The problem is that the clients think that if a loan officer is trying to push them AWAY from a product, we must be making more money with that 30 year fixed, which is actually not true.
Mike,
This came out of the wall street journal aboout 3 weeks ago.
You guessed it. The option arm that was so highly publicized and criticized has become a favorite for lawyers nationwide. Instead of condemning the program, lawyers are now trying to seek compensation for "damages" as a result of these misleading mortgage programs.
As you probably know, the option arm has been highly scrutinized by such media powerhouses as Business Week magazine, and now all that negative press is resulting in threats of a lawsuit.
Just the other day I heard an advertisement on the radio regarding option arm loans. At first I thought it was just another ad from a mortgage lender suggesting a move out of an option arm into a fixed program. Then they dropped the "L" word and my jaw dropped.
It mentioned that if you were misled or not told all the details about these deceptive programs to call now. It sounds like some lawyers are trying to get a class-action lawsuit going to tear some of the profits away from lenders and banks that made a veritable killing on these programs over the last few years.
While I'm not 100% surprised that it has come to this, I am curious to see if a lawsuit will actually be successful. After all, homeowners sign the documents that explain the parameters of the program, and if you pay a fraction of your mortgage payment each month, you shouldn't be surprised when that payment finally comes back to bite you.
The option arm was never intended to be a way to avoid making your mortgage payments each month. It was about flexibility. Of course many loan officers and lenders touted the program's low payment highlights without shedding light on its dark underbelly, but whose fault is that?
Read before you sign is how I see it. That said, shame on the loan officers and lenders who placed huge incentives on the sale of the option arm. It was clearly morally wrong, but whether a lawsuit will pan out is to be determined.
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I will agree with the earlier post the "Snake Oil Salesman" are all too the norm in this industry.
As Realtors we have a fiduciary duty to advise our clients. Especially if they are making poor decisions.
Think about this: If you advise someone to invest their money wisely will they think you are porfessional? Will they be inclined to send you referals?
Even if you loose 1 deal you may gain a CORE ADVOCATE who will drive business to you because of your HONESTY and PROFESSIONALISM.
You may be the only voice who does not look at the commission check as the paramount of the deal.
Go sell something.
CH
Thanks for the post. An excellent reminder.
Same product just explained in a different way. This is simply a gimmick, i wonder how many clients fall for this.
Eddy
I get asked from clients all the time what I think of this loan (or similar) and across the board advise against it. Unless you consider getting called by the client to re-list their pre-foreclosure home because you advised them to take a loan like this a positive referral, advise them to run away from it.
Great post!
Mike,
Thanks for posting this information and I just posted recently on how the Mortgage Accelerator programs may actually cost you more in the long run. That post can be viewed here... http://activerain.com/blogsview/48018/Money-Merge-Accounts-Are
The blog uses a scenario from someone that asked for my assistance and I would consider them to be the ideal candidate for the MMA type prgograms. Even in their situation, when running a side by side comparison using a disciplined approach, they would be better off keeping their mortgage for 30 years and not using the mortgage accelerator program.
Just thought readers of this post may want to read that one as well.
Keith-
You said, "The only reason I can think that Mike has chosen to Lump together "Neg AM" option ARM program with "MMA type" programs is because he does not understand either of them...."
I beg to differ.
I did not lump them together, I pointed out that the two were being heavily marketed by an office in my building. The two were being sold by low level LO's in my building (and elsewhere).
But I will lump them together in this way if you like...
Both can and are extremely wonderful loans when applied to the correct person and correct situation. Conversely, both will also have devastatingly negative consequences when applied to the incorrect person and incorrect situation.
You said, "But an MMA works wonderfully for the "disciplined individual" and I can agree with that. Keyword is Disciplined.
I ask, who's watching the gate? Who's going to make sure each and every MMA loan that gets sold is only sold to registered card carrying disciplined individuals?
If anything, I showed the value of understanding human nature.
Go back and read that again. Everyone who was sold a POA had the ability to take the difference between their minimum payment and what they should have paid and invest that in stocks, bonds, etc.
If they had that "Discipline" they would end up light years ahead, equity wise down the road. Agreed?
History shows us they didn't and they don't. They are heading down the road to financial ruin. These are the same people you are marketing your "Disciplined" product to. That's a problem in my eyes.
Putting links to the .swf and watching the movie doesn't change the truth. The truth is that people being like people are, they are and will, as a rule, not apply the same discipline required in the video to net the results you are trying to state. When they do not, then what happens?
If you are disciplined - more power to you my friend. It's a great loan for you.
I'll keep stating my position, not by lack of knowledge as you suggest, more by my lack of ignorance.
With poeples tendency to make the minimum payment and keep on spending elsewhere...isn't this a debt accelerator?
Excellent post
Hi Brian-
Can someone explain what exactly is a Carnival?
I know it's too late now to enter but then again - I like my official submission there better.
But is a Carnival just another name for a contest?
Hi John-
Thanks for the kind words.
I'm willing to let the whole thing go.
I'm not going to change Keith's mind and he won't change mine.
But that doesn't mean I didn't chuckle at your very witty quip! Good one!
I have to agree with Jeff that the method of sale is as infuriating as the product. What really gets my boiler heating with these programs is the blithe manner in which the lenders are trying to push them. My Countrywide rep seemed to forget he had other programs for a couple of months, but only when speaking to our newbie L.O.'s. They just loved the program, but they didn't have a clue what the downside was. We didn't allow them to write on the POA's either. In fact no one in our shop writes one unless the customer asks for it and can prove he/she understands it, and has the asset base to handle it.
I understand where Keith is coming from in his post about being responsible in selling this product, and I too understand human nature (teach for 18 years like I did and you develop that). It is for that reason that I stay away from these. I look at it this way using the story of man's fall into sin from the Bible. (Yeah, I went to Sunday School as a kid, too.) I doubt that Eve was hungry, but the snake sold her on taking a bite from the apple anyway. POA's can be really tempting - I generally don't feel qualified to determine who will be able to handle the temptation.
If I understand Keith's position in his blog MMA Type mortgage Accelerator programs and Negative Amort Option arms are NOT THE SAME!!!! what one does is filters the paycheck through the HELOC to pay the first. Any money greater than the total needed to pay of the HELOC goes directly to payment of principal on the first. (BTW, if other charges against the HELOC don't allow for complete or greater than complete payment on the HELOC you must need a bigger paycheck to keep from gradually growing a balance in the HELOC) If you want to save some of your paycheck, or use it as cash for the month you take money out of the HELOC. Since your check should be sufficient to pay that back at the end of the month your interest is minimal or zero depending on the HELOC. That's where the discipline comes in on the MMA. Of course, you'd better have another money source for catastrophic and emergency money (I guess that's the check you wrote yourself from the HELOC and put in savings elsewhere.
Now, I'm sure Keith will correct me if I just made a complete fool of myself, and will smooth of the rough edges if I got it close. My problem with this is it smacks of what the payday loan industry does without the usurious interest rate. Basically you use this months check to pay your mortgages and then use your 2nd position HELOC to pay for the rest of the month's expenses.
Keith, If this is relatively correct as far as the last sentence of the paragraph above I can tell you my problem with it. It is that I've dealt with a lot of borrowers in this industry and precious few seems to me to have the discipline needed to pull this off. I say this because virtually all of them have credit card balances that are not paid off monthly. I would expect that the same will eventually happen with the HELOC. Frankly I want to see the credit responsibility of high 700 credit to even consider being comfortable with this product. That may be unfair to the product, and even the potential borrower, but I have trouble seeing the early payoff benefit trumping the possible risks.
If folks have the discipline to do this, I would rather just set them up with a re-amortization of their existing loan where making an extra monthly principal payment will lead to a targeted early payoff.
My 2 cents (and I guess a bit more)
Terry-
That was worthy of a post all it's own!
I tried to make the distinction that what I was comparing this loan and a POA to was the the manner in which they are sold to the public and the manner in which the public behaves. You and I can see the downside and pitfalls - but I strongly believe that this loan needs to be fully explained to the person getting this loan.
Human nature being what it is -
That was the connection I was trying to convey to Keith. He chooses not to see that, and that's ok. I know they are not the same loan, how could they be? Thanks for the comment!
I wrote dozens of option arms over the past 5 years.. and you know what, Not one of my clients is calling to complain. I wonder why? Because I educated them on how they work, as well as why not all option arms are the same. Many are bad due to the index used, among other things. Even the mortgage acceleration programs can be utilized greatly to save on interest. provided you have discipline of the borrower, and educate them properly on how to utilize the concept. To just sell an MMA or CMG Product or even the Option Arm and then never communicate with your client again is wrong. But don't classify all of them under the same roof and call them bad.