A Mortgage Broker Reveals the Tricks of the Trade
"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as
"There's an old saying in the mortgage broker business: The biggest liar gets the deal," says one home loan broker who has been in the business for more than 15 years. We'll call him Victor to protect his identity.
"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as much from the borrower as they can before they notice. Most agents do the latter," says Victor.
It's hard to ignore the news lately about sub-prime mortgages, predatory lending and the surge in foreclosure rates. Making sense of how this debacle happened is another story. We want to find out how you can avoid common mistakes when seeking a loan. So we decided to have a very candid discussion with Victor, who's an industry veteran based in California. In his nearly two decades of lending, he has never seen anything quite like today's landscape.
A Loan with Just One Hitch
One of the most disturbing loan trends he talks about became very popular between 2001 and 2005. It's called a negative amortization loan. This is when a borrower can't afford a high interest rate because the monthly payments are too high. To close the deal, the loan agent comes up with a monthly payment and interest rate that satisfies both the borrower and the lender. There's just one hitch.
"They give the borrower a lower monthly payment based on a 1 percent or 2 percent annual interest rate, but the rate on the actual overall loan is much higher," says Victor. "So let's say the real rate is 7.5 percent, but their monthly payment is based on a 2 percent annual rate. The 5.5 percent interest they are not paying each month goes onto their balance, which means the total loan amount keeps getting bigger. So in a short amount of time, you're upside down." You can easily see why this leads to trouble. If the price of your house is not going up, but your mortgage balance is rising it's a matter of time before you owe more on the house than it's worth. That is, unless you refinance or take on a higher monthly payment.
Victor says a lot of loan brokers, "prey on the ignorance of the consumer. The consumer is like, 'Oh gosh, I'm getting a 1 percent or 2 percent loan.' They don't understand there are no free lunches. Every month, they are losing equity. These loans have been around since the early '80s, but it wasn't until recently that the loan values were 95 percent of a home's value, compared to tougher standards like 80 percent loan to value."
What's making matters worse now is that the people caught in these negative amortization loans are finding it tougher to refinance as banks have become more conservative with their lending practices and interest rates have gone up. "The agents that were really doing it a lot were people who just got into the business. These were new loan officers. It was easy to sell people on the monthly payment alone. They would never really go over the consequences down the road." Victor also points out that many of the people who signed up for the negative amortization loans were not sub-prime borrowers, but people with good credit known as A-grade borrowers.
Continued on Page 2: A Mortgage Broker Reveals the Tricks of the Trade