Exotic Mortgage Brokers: The new boiler rooms

A recent cover story in Business Week on Nightmare Mortgages generated a lot of controversy, but never much clarity:

"For cash-strapped homeowners, it was a pitch they couldn’t refuse: Refinance your mortgage at a bargain rate and cut your payments in half. New home buyers, stretching to afford something in a super-heated market, didn’t even need to produce documentation, much less a downpayment.

Those who took the bait are in for a nasty surprise. While many Americans have started to worry about falling home prices, borrowers who jumped into so-called option ARM loans have another, more urgent problem: payments that are about to skyrocket."

That sounds ominous, but it really doesn’t do any justice to the apparent fools who bought these products:

"There was plenty more going on behind the scenes they didn’t know about, either: that their broker was paid more to sell option ARMs than other mortgages; that their lender is allowed to claim the full monthly payment as revenue on its books even when borrowers choose to pay much less; that the loan’s interest rates and up-front fees might not have been set by their bank but rather by a hedge fund; and that they’ll soon be confronted with the choice of coughing up higher payments or coughing up their home. The option ARM is "like the neutron bomb," says George McCarthy, a housing economist at New York’s Ford Foundation. "It’s going to kill all the people but leave the houses standing."

How did we go from a nation of fixed-rate loving mortgage holders to this sudden spike in toxic mortgage products? It turns out that hard pitching telemarketers, in the best boiler room fashion, have been jamming these products down the throat of unwary consumers. Consider the following discussion from our media shy denizen of Maine:

I am currently receiving about 3 of these calls per month. You? Okay. I am being offered various rates, all with a 1% handle.  Most require you to go thru a voice menu if interested after hearing a recorded mini-pitch, so they’re no fun. But the ones that have piqued my interest are the ones where a hairball of a mortgage broker comes on the phone, live, calling you by your first name and immediately congratulating you on your stellar mortgage-payment record which, wouldn’t you know, has now qualified you to participate in his “program”.   

A couple of weeks ago, I played along out of curiosity  But when we got to discussing the rate, 1.2%, I believe, I asked him how or why he would want to lend money at that rate when FED funds were officially targeted at 5.25%. His response, “I don’t wanna’ talk about FED funds.  This program is about interest rates.”, caused a loud guffaw and simultaneous hang-up from me. Sound familiar? I’ll bet.

But the best ever was the weasel that phoned me last week. The pitch started out the usual way, except he called me “Dawn”. Whatever.  Right off the bat, he offered me an “opportunity to cut my monthly payments at least by half”. How? By signing up for the deal of a lifetime, a “1.7% FIXED mortgage”.   

Me: “Fixed? What’s the term?
Him: “30 years.”
Me: “Okay.  So this means that my payment is the same every month for 30 years?”
Him:  “No. It resets after 5 years at 7.25%.”
Me: “So how is that a 30-yr. fixed if it resets in 5 years?”
Him: “Listen.  This is a great program. I can cut your payments in half.”
Me: “I can’t understand how you can offer this with FED funds at 5.25%. Is a feature of this program something called negative amortization?”
Him:  (Big pause because I think I caught him off guard with the mention of n.a.) “Yes.”
Me: “So this means that every month, my outstanding balance is growing, right? Why would I want to sign up for something that puts me further into the hole every 30 days?”
Him: “Don’t worry about that.  Your real estate will continue to appreciate and take care of it.”   
Me: “Let me ask you something.  Since you can currently lend money to the US government and get nearly 5%,  why on earth would you wanna’ lend me money for 1.7%?”
Him: “The banks don’t pay me to lend money to the US government.”

Nothing in the sales pitch except a promise to cut their payment in half with a fixed rate. Where is the disclosure of risk and fees? If this was any product regulated by the SEC, someone would be going to jail.

Hello? Anyone at home in the Treasury Department on this? Office of Banking Supervision? The Fed? These fraudulent sales pitches are a cancer eating away at an increasingly vulnerable part of the economy. 

The sooner someone stops these weasels  from doing their damage, the better off we will all be.


Nightmare Mortgages
Mara Der Hovanesian
Businessweek, SEPTEMBER 11, 2006

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