Loan Modification & Home Loan News

125 Responses to “It’s Not All Subprime. Pay Option ARM’s - California’s Billion Pound Gorilla”

1. Midwesterner on Jan 1st, 2008 at 5:31 pm

   I know there are some decent people in California, but it is also an area disproportionately afflicted with amoral hedonists. It has been peopled for the last several generations by those who have left other areas not only in search of fame, fortune and a life of ease, but sometimes who had fled their troubled pasts out east. It may be stupid to continue to live through adversity in the snowy tundra, but weathering adversity builds character. The offspring of ease-seekers are genetically predisposed to being financially irresponsible. One look at Angelo Mozilo and his perma-tan explains all you need to know about why California was the origin of our mortgage woes. His move to the land of fake boobs couldn’t help but singe whatever conscience he started off with. California lenders and borrowers alike are similarly afflicted. It’s a land where all of the ethics has been bred out of far too many of its inhabitants.

2. Jackie on Jan 1st, 2008 at 7:12 pm

   That’s funny (previous comment) I believe I’ve seen fake boobs and people lacking character in all the states I’ve been to in the last 20 yrs. Besides plenty of good people too. It’s all in your perspective.

   As far as neg-ams in Cali, yes I have one , yes I’m a hard working single mom trying to achieve the American dream. No I don’t want to walk on my loan; but when I called American Home Mortgage in July of ‘07 and told them…when this time bomb resets it will explode, can we work on a loan mod. Their answer was “no, you’re current on your mortgage”.
   According to the various people I spoke with at American Home Mortgage in order to get any loan mod…etc. one has to be behind 60-90 days.
   My answer to that was, if I’m that behind on my loan payment and my credit is getting destroyed what incentive would I have to work things out. I’d rather take it all the way down to the NOD and let’s keep going to the foreclosure.

   That is not the road I took. I have had my house on the market since then with not 1 offer and reducing the price every 25-30 days. I will be contacting the bank for a short sale in Feb. since the amount the sale will bring including selling costs will be under what my loans are for.

   I am prepared to go to 1) short sale (better) 2) foreclosure and bk (not good) or 3) deed in lieu (ok)

   I will not be insulted by people’s comments on the character of people that take out certain types of loans; you have not walked a day in my shoes and you have no idea how my life is.

   I do know Moe is correct in saying this is yet to explode for California…my loan won’t reach the 110% til June of ‘08. Hopefully the house will have sold but if not it’s on to choice #2 or 3. And yes when I think of losing the home we’ve had for almost 4 years, it hurts my heart. But I have to be practical…since I wasn’t with this loan (thought I could refi this past summer) I know there are long term effects from this and that’s ok too.

   I love reading the success stories on Moe’s website, I first came looking for hope for my situation. He has great advice for many people. I’ve been researching my brains out to find a constructive way out of this situation. There are many websites dealing with short sales too and that helps.

   I just noticed today on realtytrac that the owner of my old beach cottage had an NOD filed on the property. I feel for all the homeowners that are being destroyed by the Wall St. PONZI scheme. Remember those; the people at the top (originators) make a killing and the people at the bottom are left holding the bag.

   Have a great 2008…much is in store for the economy in the US and California.

   Love your family and take care of your health because those are the most important commodities we have…..

3. Jackie on Jan 1st, 2008 at 7:19 pm

   This is a great link to market watch written by a mortgage broker in California. It is definitely an eye opener on Neg-Ams or whatever animal you prefer to call them!!!

   http://blogs.marketwatch.com/greenberg/2007/12/straight-talk-on-the-mortgage-mess-from-an-insider/

4. Jackie on Jan 1st, 2008 at 7:49 pm

   Here’s a link to a list of lenders loss-mitigation department phone numbers I came across today:

   http://www.homeloanlearningcenter.com/ForeclosurePreventContactInfo.htm

5. Brad on Jan 1st, 2008 at 7:55 pm

   My Processor worked for the closing department at Wachovia before she came aboard. She told us when Wachovia bought World, and they rolled out their pick-a-payment Option Arms, everyone from her department was brought into a sales meeting where they pressured most of their own employees to get this loan! She said they did it under the guise of a “training/educational” forum. But it was clear they wanted everyone to sign up for it as applications were passed out with the info! As they left the meeting, new departments were being ushered in to hear the BS and have this terd shoved down their throats.

   I hate option arms. I’ve brokered for years and never sold them to a single soul. I’ve educated consumers on how they worked only to lose those same people to this terrible product. Most people thought the fixed payment was a fixed rate at the teaser. First question I always asked them was: “How do you expect the bank is going to make money if they borrow it from the Federal Government at 4% and loan it to you at 1%?”
   It was in one ear and out the other.

6. JacMac on Jan 1st, 2008 at 8:18 pm

   Moe, I’m so glad you took the time out to write this very detail, informative article. Know what I found out over the holidays?

   Every one of my brother’s and sisters has a Pay OPtion ARM. Now, I’m in New York and they’re in Jersey, but they facing the same high payment woes.

   My sister spoke about a friend of hers who is facing the same trouble.

   IMO, these Pay Option ARMs were designed to fail the average American homeowner, and they are failing them. I see this crisis deepening in ‘08. It’s like a hurricane. They’ll be calm in the eye of the storm, and then when these ARMs start exploding, disaster.

7. paul on Jan 1st, 2008 at 10:08 pm

   I have been a mortgage banker in NJ for over 10 years. Do you know how many option arms I have closed in that time period??????? 4, that’s right 4. I never liked them , never will. This loan is meant for certian income borrowers/ educated borrowers who fully understand the product. All of the option arm loans that I closed went to borrowers who could pay-off there loan at anytime or damm close They knew where to put their money to work and fully understood how the loan operated. I closed one to a borrower who worked on Wall Street, had a 15 million dollar home, no mortgage on property. The borrower took out 6 million- cash out!!! The borrower was buying another company and needed the cash, but the borrower knew he would be able to repay most- if not all of the loan in about 1 year. The borrower wanted the lowest payment possible and a mortgage product that would allow him/her to cash-out such a high dollar amount. The borrower also had more than enough in assets to pay off this loan at anytime, but the borrower wanted to keep there money fully invested. I made 1 point YSP and charge him .625. No preypay. If the broker only took 1 pt YSP, the lender did not have a prepay. Point is smart borrower, knew how product worked, perfect loan match, everyone happy.

   I really feel bad for the borrowers who were sold this loan, most did not understand them, some said they understood them, some thought there were going to get rich quick…flip house!

   NOW THE BIG REASON………Mortgage Bankers/broker IN NEW JERSEY WERE NOT ALLOWED TO SELL OPTION ARMS WITH PRE PAYMENTS!!!!!!! STATE LAW!!!!!!!THAT’S RIGHT, BUT YOU KNOW WHO COULD???? FEDERAL CHARTERED BANKS…WORLD SAVINGS, COUNTRYWIDE,WAMU…..The same banks who point the finger at brokers!!!! So if the Federal Chartered Bank would hit you with the 3 YEAR PREPAY, WHICH ALLOWED THEiR LO TO MAKE 3-4 ON EVERY LOAN!!!!!!! THOSE ARE THE FACTS!!!!!!!!! Look up NJ LAW!!!!!!

   This is why we need full disclosure FOR ALL…..YSP INCLUDED!!!!

8. paul on Jan 1st, 2008 at 10:34 pm

   BANKING

   DEPARTMENT OF BANKING AND INSURANCE

   DIVISION OF BANKING

   General Provisions

   State Bank and Savings Bank Parity

   Proposed Repeal and New Rule: N.J.A.C. 3:6-12.1

   Proposed Repeals: N.J.A.C. 3:6-12.2 and 12.3

   Authorized by: Holly C. Bakke, Commissioner, Department of Banking and Insurance

   Authority: N.J.S.A. 17:1-8.1, 17:1-15e and 17:9A-24b.1

   Calendar Reference: See Summary below for explanation of exception to calendar requirement.

   Proposal Number: PRN 2002-150

   Submit comments by June 14, 2002 to:

   Karen Garfing, Assistant Commissioner

   Regulatory Affairs

   New Jersey Department of Banking and Insurance

   P.O. Box 325

   Trenton, NJ 08625-0325

   Fax: (609) 292-0896

   Email: Legsregs@dobi.state.nj.us

   The agency proposal follows:

   Summary

   The Department of Banking and Insurance (”Department”) proposes to amend N.J.A.C. 3:6-12.1 to implement the new parity provisions enacted in P.L. 2000, c. 69, § 3 (known as the “Parity Act”), and codified at N.J.S.A. 17:9A-24b.1. The grant of parity contained in the statutory amendment involves powers, rights, benefits and privileges that are possessed by Federal or out-of-State chartered financial institutions. The Department has carefully reviewed the underlying policy decisions that have led to the current regulatory system and the series of laws enacted by the Legislature to protect consumers and maintain the safety and soundness of New Jersey State chartered banks and savings banks.

   After careful review and consideration, the Department has concluded that the grant of parity was not intended to free New Jersey banks and savings banks from operating within the general regulatory structure that currently exists through the Department. The Department has also concluded that the grant of parity by the Legislature was not intended to repeal by implication important New Jersey State consumer protection laws, such as usury laws.

   Consistent with the Parity Act, the rule proposed for repeal and new rule address both New Jersey State chartered bank and savings bank parity with Federally chartered and out-of-State banks, savings banks, and savings associations. Any such power must be exercised upon the same terms and subject to the same conditions as are authorized for Federally chartered or out-of-State banks, savings banks, and savings associations. To exercise a power, right, benefit, or privilege afforded to an out-of-State bank, savings bank, or savings association, the exercise of which the Commissioner of the Department of Banking and Insurance (”Commissioner”) has not previously approved by rule, banks and savings banks will be required to submit a notice of intent to the Department, supported by information specified in the new rule, which the Commissioner may, within 45 days, approve, disapprove, or condition on safety and soundness grounds or on other grounds established in the new rule.

   The proposed new rule makes it clear that certain areas of this State’s regulation of banks and savings banks are not included in the scope of application of the Parity Act. These proposed limitations apply to both Federal and out-of-State powers, rights, benefits, and privileges. The Department notes, for example, that some national banks operating in New Jersey have claimed that they are exempt from the requirement of offering consumer checking accounts established in N.J.S.A. 17:16N-1 et seq. Consumer checking accounts are low cost personal checking accounts that require only minimal amounts of money to open and maintain. The accounts provide a substantial benefit to young, low income, and elderly people. The Department does not believe that the Legislature intended to permit New Jersey State chartered banks and savings banks to use parity to avoid their responsibilities to comply with this or certain other consumer protection laws. Accordingly, in the proposed new rule, the Department has identified the type of consumer protection laws and administrative rules that shall not be subject to parity. The Department views these proposed limitations on the exercise of parity as reasonable and necessary generally to discharge the Commissioner’s statutory responsibility to promulgate rules for the appropriate regulation of institutions within the Department’s jurisdiction. In addition, the new rule implements the legislative authorization to promulgate rules with the objective of achieving substantially competitive parity, while preserving the existing framework of the dual banking system, which there is no evident intent to disrupt, especially with respect to consumer protections enacted by the Legislature over many years.

   The limitations also serve to establish grounds for disapproving a notice of intent, in accordance with rulemaking authority specifically granted in the Parity Act.

   The application of the proposed new rule to N.J.A.C. 3:6-12.1 to both banks and savings banks would make unnecessary the provisions set forth in recently readopted N.J.A.C. 3:6-12.2 and 12.3 (see 33 N.J.R. 2079 June 18, 2001), and those sections are, therefore, proposed for repeal.

   The Department believes that the limitations on parity set forth in the proposed rule are consistent not only with legislative intent, but also with provisions of Federal law, including the 1999 Gramm-Leach-Bliley Act which reconfirmed the principle of functional regulation of certain activities traditionally regulated by the states. The Department welcomes public comment on these provisions of the proposed new rule so that the final rule adopted will provide the appropriate balance between the grant of powers under the Parity Act and reasonable restrictions on their exercise, consistent with applicable state laws for the protection of consumers and the administration of the Department’s regulatory responsibilities.

   A 60 day comment period is provided in this notice of proposal and, therefore, pursuant to N.J.A.C. 1:30-2.2(a)5, the notice is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

   Social Impact

   The proposed new rule and repeals would apply to all New Jersey chartered banks and savings banks, assuring them substantially competitive parity with their Federal and out-of-State counterparts. The proposed new rule will permit the Department to continue to require banks and savings banks to adhere to safe and sound banking practices and key consumer protections, while enjoying such substantially competitive parity. The new rule and repeals therefore, should have a beneficial social impact on the industry and consumers. Consumer reaction is expected to be positive.

   Economic Impact

   The Department expects that the ability to exercise powers, rights, benefits, and privileges authorized now or in the future for Federal or out-of-State institutions will have a positive economic impact. Banks and savings banks will be able to offer services and products that may not be specifically authorized by applicable New Jersey statutes and rules, but which may enable banks and savings banks to increase their business, their market share and, therefore, their profitability and competitiveness with their Federal and out-of-State counterparts.

   Banks and savings banks that seek to exercise parity with out-of-State institutions will incur costs in order to submit a notice of intent with the required supporting information. The Department expects that associated administrative costs will be marginal. Consumers should benefit economically from resulting increases in service and product options and marketplace competition.

   Federal Standards Analysis

   Banks and savings banks may, in the future, become subject to Federal standards pursuant to a proper exercise of parity in accordance with the proposed new rule and repeals. While the Federal standards applicable in such cases cannot be identified at this time, there will be no applicable State standards that may exceed them because parity with Federal institutions entails application of the pertinent Federal standards.

   The proposed new rule, however, also removes certain State statutory and regulatory consumer protections from the scope of parity. In some cases, these limitations may exceed Federal standards applicable to Federally chartered banks, savings banks, and savings associations, in the sense that the limitations may restrict New Jersey banks and savings banks from certain types or levels of activity in which their Federal counterparts may conceivably be permitted to engage at present or in the future. Notwithstanding the proposed limitations, under parity, banks and savings banks should soon be able to offer services and products not specifically authorized by applicable New Jersey statutes and rules, and reap the resulting economic benefits.

   As a matter of policy, however, the Department views the proposed limitations as reasonable and necessary generally to discharge the Commissioner’s statutory responsibility to promulgate rules for the appropriate regulation of banks and savings banks, and specifically to implement the legislative authorization in the Parity Act to promulgate rules with the objective of achieving substantially competitive parity while preserving the existing framework of the dual banking system, which there is no evident intent to disrupt, especially with respect to consumer protections ratified by the Legislature over many years. The costs that may result from promulgating the proposed limitations are speculative at best. Such costs, even if realized, are outweighed by the solid benefits afforded to New Jersey consumers by, for example, the continued viability of laws addressing consumer checking accounts, criminal usury, mortgage loan prepayment penalties, medical and financial records privacy, and the safety and soundness of state-chartered banks and savings banks. In addition, the Department sees no technological obstacle to the regulated industry’s continued compliance with these limitations.

   Jobs Impact

   The Department does not anticipate that any jobs will be lost as a result of the proposed new rule and repeals. If banks or savings banks increase their business or market share as a result of the parity permitted by the proposed new rule, additional jobs may be generated.

   The Department invites commenters to submit any data or studies concerning the jobs impact of the proposed new rule and repeals together with their written comments on other aspects of this proposal.

   Agriculture Industry Impact

   The Department does not expect any agriculture industry impact from the proposed new rule and repeals.

   Regulatory Flexibility Analysis

   Some New Jersey banks and savings banks are small businesses as defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. The proposed new rule will impose compliance requirements on these entities if they seek to exercise a power, right, benefit or privilege authorized for out-of-State banks, savings banks or savings associations. The compliance required will consist of requiring the bank or savings bank to provide notice to the Commissioner of its intent to exercise such power, right, benefit or privilege and will require the bank or savings bank to provide a description of the intended activity, a copy of the regulatory authority that governs the out-of-State institution that the bank or savings bank proposes as the basis of parity, and a business plan and statement describing the general or specific experience of the bank or savings bank that establishes how the proposed exercise of parity will be conducted in a manner consistent with safe and sound banking practices. If banks or savings banks seek to exercise parity with out-of-State banks, savings banks or savings associations, professional assistance in the form of attorneys and accountants may be necessary. The cost of compliance will vary from professional to professional depending on the services needed.

   The proposed new rule and repeals will grant New Jersey banks and savings banks flexibility yet require them to operate in a manner that is responsible to the industry, its customers and the general public. The Department does not believe that the compliance requirements are unduly burdensome and finds that they are consistent with prudent banking practices. The purpose of these requirements does not vary based upon business size. Accordingly, no differentiation based on business size is provided.

   Smart Growth Impact Statement

   The proposed new rule and repeals have no impact on the achievement of smart growth and implementation of the State Development and Redevelopment plan.

   Full text of the proposed repeals of N.J.A.C. 3:6-12.2 and 12.3 may be found in the New Jersey Administrative Code at N.J.A.C. 3:6-12.2 and 12.3.

   Full text of the proposed repeal and new rule N.J.A.C. 3:6-12.1 follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

   3:6-12.1 State bank and savings bank parity with [national banks] and Federal and out-of-State institutions

   [In addition to other authority granted by law, and unless contrary to State law, a bank may exercise any power, right, benefit or privilege which is now or hereafter authorized for national banks pursuant to Federal law or rules or regulations of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Any such power shall be exercised upon the same terms and subject to the same conditions as are authorized for national banks. The powers, rights, benefits or privileges shall be automatically exercisable upon the expiration of 30 days from the date of adoption by the Federal regulatory agency, except if the Commissioner of Banking and Insurance within that 30 day period provides notice that the power shall not be granted to State banks. Such notice shall be provided to each bank, and to the trade publications of the New Jersey Bankers Association and the New Jersey League Community and Savings Bankers, and/or their successor organizations, if any, for publication. The Commissioner of Banking and Insurance may permit banks to begin exercise of a power prior to the expiration of the 30 day period by providing notice of permission to each bank and to the above mentioned trade publications.]

   (a) Banks and savings banks may exercise those powers, rights, benefits or privileges authorized as of (the effective date of this rule) and thereafter for national banks, Federal savings banks or Federal savings associations, either directly or through a financial subsidiary or other subsidiary, to the same extent and subject to the same limitations as national banks, Federal savings banks or Federal savings associations may exercise those powers, rights, benefits or privileges. Except as otherwise provided in this subchapter, pursuant to N.J.S.A. 17:9A-24b.1, banks and savings banks may exercise such powers, rights, benefits or privileges, notwithstanding the provisions of N.J.S.A. 17:9A-1 et seq. or any other law.

   (b) Banks and savings banks may exercise those powers, rights, benefits or privileges as of (the effective date of this rule) and thereafter authorized for out-of-State banks, savings banks or savings associations either directly or through a financial subsidiary or other subsidiary, to the same extent and subject to the same limitations as out-of-State banks, savings banks or savings associations may exercise those powers, rights, benefits or privileges, provided that before exercising any such power, right, benefit or privilege, the Commissioner has approved, by rule, the exercise of such a power, right, benefit or privilege by banks and savings banks generally, or the bank or savings bank provides notice of its intent to exercise such a power, right, benefit or privilege to the Commissioner and, on a case by case basis, the Commissioner either approves the activity or does not determine within 45 days of such notice that the power, right, benefit or privilege is not to be exercised by the bank or savings bank on grounds of safety and soundness or on other grounds designated by the Commissioner by rule. Except as otherwise provided in this subchapter, pursuant to N.J.S.A. 17:9A-24b.1, banks and savings banks may exercise such powers, rights, benefits or privileges, notwithstanding the provisions of N.J.S.A. 17:9A-1 et seq. or any other law.

   (c) The parity provided by N.J.S.A. 17:9A-24b.1 shall not permit a violation of:

   1. Any provision of the New Jersey Code of Criminal Justice, N.J.S.A. 2C:1-1 et seq., including, but not limited to, the criminal usury limits established at N.J.S.A. 2C:21-19 as applied to loan products.

   2. New Jersey statutes and rules providing for the structure and corporate governance of banks and savings banks, including, but not limited to, those governing amendment of a certificate of incorporation and adoption of bylaws, and those establishing rights of shareholders and members and the membership of a board of directors;

   3. New Jersey statutes and rules providing for the safety and soundness of banks and savings banks, including, but not limited to, the limitations on liability to a bank as set forth at N.J.S.A. 17:9A-60 et seq., limitations on leeway investments set forth at N.J.S.A. 17:9A-24.12, and those providing for reports to and examination by the Department, including, but not limited to, N.J.S.A. 17:9A-252 et seq.;

   4. New Jersey statutes and rules providing the Department with supervisory powers over banks and savings banks, including, but not limited to, the power to issue orders and apply for relief from a court of competent jurisdiction established at N.J.S.A. 17:9A-266 et seq.;

   5. New Jersey statutes and rules regulating real estate appraisers, real estate brokers, real estate salespersons, and real estate broker-salespersons, including, but not limited to, the licensing and other provisions of the Real Estate Appraisers Act, N.J.S.A. 45:14F-1 et seq., and the licensing and other provisions of the Real Estate License Act, N.J.S.A. 45:15-1 et seq.;

   6. New Jersey statutes and rules regulating insurance companies and insurers, including, but not limited to, the authorization and other provisions of N.J.S.A. 17:17-1 et seq., N.J.S.A. 17:46B-1 et seq., and N.J.S.A. 17B:17-1 et seq., provisions of the trade practices acts, N.J.S.A. 17:29B-1 et seq. and N.J.S.A. 17B:30-1 et seq., and provisions of the Insurance Information Practices Act, N.J.S.A. 17:23A-1 et seq.;

   7. New Jersey statutes and rules generally regulating insurance producers, including, but not limited to, the licensing and other provisions of the New Jersey Insurance Producer Licensing Act, N.J.S.A. 17:22A-1 et seq.;

   8. New Jersey statutes and rules regulating health maintenance organizations, including, but not limited to, the Health Maintenance Organizations Act, N.J.S.A. 26:2J-1 et seq. and the Health Care Carrier Accountability Act, N.J.S.A. 2A:53A-30 et seq.;

   9. New Jersey statutes and rules regulating viatical settlement brokers, representatives, and providers including, but not limited to, N.J.S.A. 17B:30A-1 et seq.;

   10. The prepayment penalty prohibition established at N.J.S.A. 46:10B-1 et seq. as applied to mortgage loan products;

   11. The provisions of N.J.A.C. 3:1-16 as applied to the processing of mortgage loan applications and loans;

   12. The provisions of N.J.A.C. 3:1-2.15 as applied to the closing of an office;

   13. The provisions of N.J.S.A. 17:9A-316 prohibiting the establishment of a de novo branch office by a foreign bank;

   The provisions of N.J.S.A. 17:16N-1 et seq. regarding Consumer Checking Accounts;

   The provisions of N.J.S.A. 17:9A-1 et seq. and 17:12B-1 et seq. requiring any application or approval process; and

   The provisions of the Uniform Commercial Code as adopted in New Jersey at N.J.S.A. 12A:1-1 et seq.

   Prior to the exercise of any power, right, benefit, or privilege exercised by an out-of-State bank, savings bank, or savings association, a bank or savings bank shall submit a notice of intent for the Commissioner’s approval. Such notice of intent shall include: a description of the intended activity and a copy of the statutory or regulatory authority, including any pertinent regulatory interpretation of such authority, that governs the out-of-State institution that the applicant bank or savings bank proposes as the basis for such exercise of parity, and a business plan and statement of the general or specific experience of the applicant that establishes how such exercise of parity would be conducted in a manner consistent with safe and sound banking practices. The items submitted as part of the business plan and the statement of exposure shall be treated as confidential by the Department and shall not be public records pursuant to N.J.S.A. 47:1A-1 et seq. The Commissioner may disapprove the exercise of any power, right, benefit or privilege on the grounds of: an incomplete notice of intent; safety and soundness; or other grounds as provided in this subchapter. The Commissioner may condition the exercise of any power, right, benefit or privilege on the grounds of safety and soundness; or on other grounds as provided in this subchapter.

   A bank or savings bank that violates the provisions of this subchapter shall be subject to the enforcement provisions of N.J.S.A. 17: 9A-267, 268 and 269.

   Pa683b/inoregs

9. paul on Jan 1st, 2008 at 10:39 pm

   Dreher Langer & Tomkies L.L.P.
   Attorneys at Law
   2250 Huntington Center
   41 South High Street
   Columbus, Ohio 43215
   Telephone (614) 628-8000
   Fax (614) 628-1600

   NEW JERSEY PROHIBITION AGAINST PREPAYMENT PENALTIES PREEMPTED BY OTS REGULATIONS

   In Glukowsky v. Equity One, Inc., 2004 WL 1159735 (N.J. May 26, 2004), the New Jersey Supreme Court held that the prohibition against prepayment penalties under the New Jersey Prepayment Law (”NJPL”) was preempted by former Office of Thrift Supervision (”OTS”) regulations, which gave state-chartered housing lenders power to charge prepayment penalties in alternative mortgage transactions (”AMTs”).

   In Glukowsky, the plaintiff obtained a “balloon” mortgage loan from Equity One, Inc., which loan qualified as an AMT under the Alternative Mortgage Transaction Parity Act of 1982, 12 U.S.C. 3801 et seq. (”Parity Act”). When the plaintiff subsequently sold the property securing the loan, Equity One exercised its right under the loan contract to demand full payment and impose a prepayment penalty. The plaintiff filed suit against Equity One, claiming that imposing such a fee violated, among other things, the NJPL. The lender filed a motion to dismiss, arguing that OTS regulations preempt any state law, including the NJPL, that prohibits a state-chartered lending institution from charging a prepayment penalty on an AMT. At the time of suit and prior to its amendment in 2002, Section 560.220 of the OTS regulations had extended Section 560.34 of the OTS regulations, which permits federally-chartered housing lenders to impose prepayment penalties, to state-chartered housing lenders.

   The trial court agreed with Equity One and dismissed the plaintiffs complaint on the grounds of federal preemption. The appellate court, however, held that the OTS exceeded its authority under the Parity Act when promulgating Section 560.220, and thus reversed the trial court. The supreme court disagreed and reversed the appellate court. In support of its conclusion, the supreme court indicated that the OTSs enactment of Section 560.220 should be given deference unless it acted outside the scope of its authority or arbitrarily. According to the supreme court, the OTS did not act in either manner because at the time of enactment, it was reasonable to conclude that Section 560.220 would promote the main goal of the Parity Act, that being achieving parity between state-chartered and federally-chartered housing lenders. The supreme court also indicated that in the interests of judicial comity, it should give due consideration to the interpretation of the Parity Act by federal courts, which had uniformly concluded that the OTS acted within its authority by promulgating regulations preempting state laws governing prepayment penalties. For these reasons, the supreme court refused to invalidate Section 560.220, and thus, held that the NJPL was preempted by federal law.

   For more information regarding this Alert, please contact Jeff Langer at (614) 628-1602 or jlanger@dltlaw.com or Chuck Gall at (614) 628-1605 or cgall@dltlaw.com.
   Jeffrey Langer and Charles Gall

   FTC SEEKS COMMENTS ON PROPOSED REGULATION TO LIMIT MARKETING SOLICITATIONS FROM AFFILIATES The Federal Trade Commission is seeking public comment on proposed regulations implementing the affiliate marketing provisions in Section 214 of the Fair and Accurate Credit Transactions Act. Section 214 (i) adds a new section to the Fair Credit Reporting Act regarding affiliate sharing (see 15 U.S.C. 1681s-3) and (ii) requires the federal banking agencies, the National Credit Union Administration and the Securities and Exchange Commission to make rules implementing Section 214 in coordination with one another. The proposed regulations, which would be added as a new Part 680 of Title 16 of the Code of Federal Regulations, would generally prohibit a company from using certain information received from an affiliate to market products or services to a consumer unless the consumer first has been given notice and an opportunity to opt out of receiving such solicitations.

   Comments must be received by July 20, 2004. Please do not hesitate to contact us for more information about the proposed regulations or assistance in drafting comment letters.
   Elizabeth Anstaett and Vanessa Nelson

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10. Midwesterner on Jan 1st, 2008 at 11:41 pm

    I stand by my initial comment that California is disproportionately populated by people lacking in moral character. That doesn’t mean most Caifornians are ethically deficient. It simply means that a higher percentage of people there are ethics-challenged than elsewhere in the country. This is widely understood.

11. Dave on Jan 2nd, 2008 at 12:55 am

    In response to Midwesterner there is Californians and then there are Californians. There are a lot of hardworking decent people here, but some places in the State do have a greater proportion of the ethically challenged then others. For instance coastal Orange County and San Diego have some major supplies of worthless humans as does some of the Bay Area (Marin for instance). But others have pretty good people, especially in the North and inland. And it isn’t like other parts of the country don’t have their fair share of nuts, criminals, and the like. I would say there are a lot of ethically challenged on Wall Street for instance.
    I think what you are seeing is that the rich for whatever reason started moving here awhile back and pushed the prices up for everyone else and then everyone else just tried to keep up. It is hard to fight the societal pressure to be successful. Everyone was telling you to buy now or loose your chance forever. Many have invested a lot of themselves in trying to make a living out here. This can be very dangerous psychologically as it is hard to tell yourself you didn’t make it and have to give up. The banks preyed on this, as did the Realtors. And you can’t dismiss the large amount of propaganda that has been told to people regarding California for the last 50+ years. This has attracted many glitz seekers, but mostly to LA and San Diego. The rest of the state is mostly farms and/or empty save the Bay Area and a few cities in the Great Valley. So as a non-native Californian I would ask that you don’t condemn the whole state for the excesses of some. Now if you want to condemn Orange County go right ahead, for all I care it can slide off into the ocean! But I could say that about some places back East too.

12. Virginia on Jan 2nd, 2008 at 2:21 am

    Okay…..I have to pipe in. This is most innane post I have ever read! Good grief! California has an inordinate amount of people of questionable moral character therefore, that is reason we are in the crisis we are in? Okay, let’s throw out some more ridiculous generalizations: Nevada’s housing slump is because it allows gambling and there are immoral people there. New York deserves everything they are experiencing because of the immoral, greedy people there. New Jersey should sink because they have greedy, immoral people there…..I could go on and on but you get my point…….But let’s go live in the midwest……yes, that is where we should live because it does not have immoral, greedy people living there who did not sell sub-prime loans and Option ARM products?

    Hey, there are immoral, greedy people in every state of the union. Moe……any comments from a fellow Southern Californian?

13. NC.loanofficer on Jan 2nd, 2008 at 2:59 am

    Good post. I have been warning family in CA and FL about the coming problem with Option ARMS… that could make the sub-prime mess look like a blip.

    With BC loans at least there is the hope of modification to keep rates/payments fixed or to do short sales. How can you convince someone at a 1-2% payment rate to take the “real” rate of 7-8% or do a short sale when they are at 100-120% LTV?

    Homeowners will not be able to take the 2-3x increase in payments (some barely make the 1% min payment rate) and lenders can not survive if they take 20-30% hits on 500k loan amounts.

    In 5 years as a loan officer, I think I did whopping 2 Option ARMs. Both were to financially savvy buyers with assets, credit and the rest. They put 20-30% down and had more, but they were SE business owners with highly seasonal income. They needed to pay less in the off season and then would pay it down when income came in…. that is what this loan is for.

    The average client who wants it because the LO sold them on a $800 min payment (without escrows) on a 200k loan with 5% down…. hard times. I sat in on the training sessions from Countrywide and World Savings at or branch. I saw the managers and LOs salivate over the YSP and how easy it was to sell someone on 1% min payment. None of them new what the COSI or LIBOR were or how neg am worked, but all that was covered in the course as how to sell those terms anyways… not wht they meant.

    I truly believe that I/O (not Option ARMs though) are great loans for rational, educated borrowers. But I also believe that most clients will not use it wisely, after all look at how most people use savings accounts (never) and credit cards (often).

14. Virginia on Jan 2nd, 2008 at 3:21 am

    NCLO

    Most referral based loan officers, who are career oriented, did not sell inappropriate loans to anyone with a credit score. Most of the people I know and work with keep their compensation to 1 to 1.25 TOTAL points (origination and YSP) and only used YSP to offset costs to the borrower (which was thoroughly explained and disclosed). YSP was not used to increase compensation and gouge the borrower. It was always the borrowers’ choice if YSP was used.

    If you read through the posts, most of us could count on our hands how many POA were sold to our clients and most of them were to real estate investors who knew exactly how to work them. I personally have a 7-year interest-only product and like the flexibility of paying the interest-only payment if I need an increase in cash flow (which of course comes in handy now) OR I can pay down the principal in however large a payment I want and have the next month’s payment based on the new balance, not the original balance. These types of loans are invaluable to people, such as myself, who are commissioned only/self-employed and may need the flexibility of lower payment to increase cash-flow…..

15. eric j jenkins on Jan 2nd, 2008 at 5:33 am

    option arms will cause problems for sure. but the definition the author gave is incorrect he defined a heloc(home equity line of credit) an option arm or pick a pay/flex pay, is a loan where 4 payments are given as a monthly option. a fully amortized 30 yr pmnt. 15 yr pmnt. int only pmnt and a minimum monthly payment which is advertised. the minimum payment is negative amortization, meaning not enough to cover the interest alone for that month. so the principal balance actually increases every month the borrower makes a minimum pmnt. allowing the loan to go to a max of 115 percent of the original loan amount before requiring fully amortized or interest only payment in some cases. in any declining equity market, this loan will cause enormous problems for borrowers who payed the minimum payments.

16. Kim on Jan 2nd, 2008 at 6:43 am

    I have been in the mortgage industry for 15 years. Underwriter for 5 of them. I have seen all different borrower income brackets, credit and situations. I have worked with a TON of broker offices. Several years ago when the Option arm was at it’s height Brokers were making a killing on the back end without blinking. They did not have to even know what the Option Arm was!! They just knew they could make a ton. There were disclosures that would be signed by the borrowers regarding these Option Arms that even the most educated people would be confused by. It was quite alarming how many people that these loans were being offered to. When I first started U/W these loans we were given very brief information on these. We were told “These loans are truly for the business savvy borrower”. We were told these loans will help people save for college for little Johnnie and give borrowers cash flow to “Invest”. It was all “Bull”!!!! I think out of the tens of thousands of loans that I U/W maybe a handfull were “Business Savvy”!! The borrowers I U/W did not currently have any savings, most did not have the same job for 2 years and their credit was less than perfect. They could NEVER qualify for the loan if the recast payment was used to qualify them. I made several comments to brokers letting them know these loans were quite dangerous. I asked them if they had “educated” their borrowers on the terms of these. Almost all said “No”. They just knew they could make a Ton of money and that I just needed to U/W the loan and pretty much keep it to myself. I even brought it to the attention of the Upper Mgmt that the borrowers were really not being educated on these loans. That borrowers should know what they are getting into. It did not matter to them either. They just saw the dollar signs and not the people. Greed has taken over and now it is time to pay the piper!! Unfortunately the innocent will suffer.

17. hmpierson on Jan 2nd, 2008 at 6:52 am

    Jackie wrote:

    …snip

    I’m a hard working single mom trying to achieve the American dream.

    …snip

    I feel for all the homeowners that are being destroyed by the Wall St. PONZI scheme. Remember those; the people at the top (originators) make a killing and the people at the bottom are left holding the bag.

    …snip

    I certainly don’t want to add to your troubles, but I have to ask…did you realize what you were doing when you took that mortgage?

    You blame the “Wall St. PONZI” scheme, but it seems to me that by taking that mortgage, you were a willing participant in the “PONZI scheme” who expected to profit from it. i.e. you were a real estate speculator who expected to sell at a profit before the reset.

    That’s why most Americans are against any sort of bailout - I rented instead of getting on board, BECAUSE I saw real estate as a “PONZI scheme.” We don’t want to pay one penny to help anyone who paid less in “mortgage” than we paid in rent, while living in a nicer house than they could afford.

    If the government is going to write checks, where’s our check for acting responsibly and not living over our heads?

18. Bob on Jan 2nd, 2008 at 9:14 am

    This is a great article. I used to blame the people that were taking out loans for not reading through the details or understanding what they were getting themselves into. But then I had another thought…

    Working in investment banking, you do forget that the terms like “Option” and “ARM” are not widely understood. Now, before you blast me, I have nothing to do with the packaging of mortgages or other types of debt but rather in share trading. The whole area of Options and ARMs is incredibly complex. Negative amortisations and lots of other complex terms are often bandied about but when it comes down to it, yes people have some responsibility to understand what they are signing BUT the person selling them has more responsibility, especially if they are being not completely truthful with all the details - probably because they do not understand it themselves.

    So who can we blame - the people that took out the loans? A little but to be fair, these people were after a loan.

    The groups that are responsible and should also bear the burden is the people that had the money to lend. Let’s think of this a little bit differently. I walk into a bakery store and buy a loaf of bread. If I do not have the money, the baker will not sell it to me. If I become a good customer at the bakery, then the baker will give me a little credit but never too much.

    So, if the baker is being very careful with giving me bread up to $20, you have to wonder why a bank would be handing over $200,000 without any hope of repayment? In my example, the baker would assume the loss if I decided never to come back, so shouldn’t the bank as they should have been more careful with their own money (hence their shareholders)?

    In a free market system, the people making the loans should have been more careful. Their own fault. No bailouts. If politicians had the guts, they would say this clearly to the original loan companies.

    Now, the loans were packaged and sold the way shares are around the world - however there is no reason that the companies/funds that own the mortages do not start to pre-empt things and talk to the people with the loans, then they should take the hits as defaults rise.

    If I was in a situation, I would not want to ruin my credit history by defaulting. However (some of you are really going to hate this) being a rational free marketer, if I had assets of $200,000 and the loan is $500,000, with equity of $100,000 - does it make any sense to pay this off? NOPE! As long as there is a reason for not destroying my credit (such as not working in certain professions), any rational individual would be crazy not to default. This does not mean people are morally bankrupt or have fake boobs or male members, it means they are acting rationally.

    Making moral judgements of people based upon stereotypes and lack of understanding of people’s individual scenarios is unfair, and given this is now the 21st Century, it would be nice to move away from this.

    I do wish people in difficultly my best wishes. It is not easy going through the uncertainty that the next few months will bring, but there is more to life than material things. If the worst should happen and you loose your home, you should be willing to rely on your friends and concentrate on things that actually make you happy.

19. Virginia on Jan 2nd, 2008 at 9:52 am

    Point of clarification: My post #12 was in response to Midwesterner’s posts #1 and #12, not the original article which was excellent.

20. Moe on Jan 2nd, 2008 at 10:06 am

    As far as the generalizations about fake boobs and lack of moral character in Southern California, I stand by these claims because it is the truth. Just like this is the land of the slimy broker, 745 beemer driving, sushi eating, never, ever should have sold a loan in your life capital of the world.

    This is not a blanket comment because there are a tremendous amount of good people, good brokers and natural beauties who have plenty of moral character in California. I am proud to be a Californian.

    There were more loans churned out in places like Quick Loan Funding, Bridge Capital, Ameriquest and other chop shops that churned the toxic crap out by the thousands.

    Thanks for the comments Jackie and JacMac. It’s nice to hear from the homeowners. In no way am I bashing anyone that took out these loans. Many were sold to borrowers who did not understand them and even the loan offciers selling them didn’t . They only understood the commission they were making.

    Virginia - I did not say that California is in this crisis because of questionable moral character. But the reason that California is in so deep is because of the fact that lenders targeted this state to make as many loans as they can and a huge number of POA’s. Which I have more than supported with data.

    There are definitley people of questionable moral character in every state in the union and Southern California is a great place to live and I love it here.

    But there are just too many people living way above their means and living on credit and pay option ARM’s.

    NC, Eric, Bob, great comments. Paul,

    Kim - It’s nice to hear from the underwiters too. They always seem to agree with my observations.

21. Michael on Jan 2nd, 2008 at 10:06 am

    Very interesting posts, but not one call for action.

    Does anyone here believe that Wall Street should NOT be held accountable? We may have witnessed the destruction of capitalism and should demand convictions.

    The chairpeople for federal agencies who should have been regulating were appointed by our current president. The most important sector in any economy is the banking sector and for the last few years it has been complete anarchy. All of these crooks and the inept should be removed from office immediately.

    We are in the first inning of a double header and it will get much worse if we allow the perpertrators to devise the solutions.

    We should start by impeaching “our” VP
    http://www.wexlerwantshearings.com/

    We should also demand that Dodd initiates the formal hearings against Paulson.

    http://www.youtube.com/watch?v=lIJNBtoxgy4

    sign up now and get involved in democracy or watch it disappear as you have done with your career.

    http://www.youtube.com/watch?v=0ZvF0OUx5eU 2:20
    http://www.youtube.com/watch?v=Fz9ogbjKquA&NR=1 5:49

    We have laws that need to be enforced:
    http://www.michaelblomquist.com/complaint/Title/18/1014.htm

    Clearly we don’t have the resources to convict every borrower and l/o behind these originations but we can convict Paulson, et al; the ones that gave birth to this epic crisis.

    Wake up America!

22. Jackie on Jan 2nd, 2008 at 10:26 am

    To comment #17… No I am not a “speculator”. Once again someone ASSUMING they actuall know about my life. Due to a personal situation I got into a POA with the obvious intention of refinancing this past August. I have worked in the same business for 15 years and have a great son. If you read about the lending business and how the brokerage firms were involved you might see the bigger picture.

23. Betsy on Jan 2nd, 2008 at 12:06 pm

    Being in the mortgage industry for 25+ years, I have seen almost every conceivable “mortgage animal” that has been out there. In the 80’s, it was the Ben Frankiln ARM with a note rate 4% above the payment rate, and a neg am cap of 125%. These were a favorite with LOs linked with builders of condos and townhouses. The max LTV was 95% and this product was HOT!! I was a processor at the time, and I often mentioned I wanted to revisit those files in about 3 years to see how it had all worked out…or not. Even then, those of us with a sense of “what could be”, worried about this type of loan and it’s possible ramifications. I worried about the unsuspecting borrower then and still do. Let us not forget the Gov’t GPARM and it’s effect on borrowers. This type of loan, no matter what it’s called, will always be ready to rear it’s ugly head in yet another guise. There will always be another carrot to dangle out there to get unsuspecting borrowers to jump at it. Have you ever noticed the line added to disclosures and legal docs the borrowers sign: “I have read and understand the above”? In order to understand lending terms, especially the complex ARM products, the borrowers would have to be provided with a very complex flow chart, a book of mortgage terminilogy, and an HP, at the very least. Not to mention an instructor who could break it all down into a simple, understandable language.

    Now, I am an unemployed underwriter. In my career, I approved thousands of loans: Prime, Subprime, Alt-A, Standalone 2nds, Piggys, First Time Home Buyers, you name it. But, the borrowers were what I looked at closely. I was concerned about the borrowers, and what could be waiting for them behind “door number 3″. But, as most underwriters will agree with me, management told us to approve these loans, no matter what the level of apprehension we may have been feeling. WHY? Because “they fit”. They fit the investor’s guidelines. I would sign, but my apprehension would not be lessened.

24. NC.loanofficer on Jan 2nd, 2008 at 12:36 pm

    Viginia

    I have read many of the posts and it makes me feel better knowing that there were other LOs that felt the same way I did and used these products properly.

    I too see great value in this, I/O and ARM loans… but when used by the right people in the right way. I sold a few I/O loans becuase they made sense and the people understood the pros and cons. Nice to know we weren’t all out for the quick buck and some LOs were really trying to help clients.

    It was hard seeing all the people pitching Option ARMs (and fraud) making the easy money while we had to work for our clients. I lost a few deals when the client would not see past the payment… to have them come crying to me over the last year for help. Most times, there was nothing to be done unfortunately, but I guess people are starting to see the difference between listening to a good sales person and a mortgage consultant.

25. DJ on Jan 2nd, 2008 at 1:12 pm

    Having been in the wholesale end of the business with Option Arms as one of my products, 99% of the time the loan officer would ask for “max prepay, max rebate”. Seldom was there any concern for providing the borrower with a shoter prepay period because that would reduce the rebate. With a 3 year prepay rebates were typically around 3%. However one lender who did a ton of OA’s offered 4+% and another for a short time 5%. Also if they could sell it the LO’s would charge points on the front. The only thing LO’s cared about was the large commission. They did not understand the product themselves so no way could they educate the borrower, nor did they want to. They sold the minimum payment and borrowers eagerly took the bait.

    On one occassion I was talking with a competitor and he mentioned his company had paid a broker $100K in commission for one loan. Obviously a large loan amount and you can bet there was a 3 year prepay. I fail to comprehend how a single residential mortage is worth $100K in commission. I do want to qualify this in saying I have to take his word for it as I certainly never saw any documentation but I can see how it would be entirely possible.

26. chicagomike on Jan 2nd, 2008 at 1:14 pm

    To Moe - great article warning more people who didn’t already know about the disaster looming large. To strike a crude analogy: when the option ARM crap really hits the fan it will make Katrina look like a brief rain shower like San Diegans experience once in a great while. The repercussions on Wall Street will far exceed a “correction” and many people who have no stake whatever or no connection with option ARMS will suffer investment losses as a result of the implosion.

    So where does the culpability lie? Before I posit my opinion, I’ll say that I have been engaged in banking, consumer finance, and mortgage origination for 30+ years. For the last 5 years I have originated primarily rehab loans, both conventional and FHA 203K’s. Most of my business comes from referrals of REO brokers, and thanks to the necent wave of foreclosures and the coming tidal wave, business has been good and will get even better, not that I would wish the loss of one’s home on anyone.
    I have never originated an option ARM.

    That said, I feel obligated to comment on the culpability question, and yes, someone should be blamed for what’s coming! Simple answer, all parties! Lenders, borrowers, and brokers. The motivation is a common one: GREED. Except for the examples given above by Paul in New Jersey, about option ARMS to savvy borrowers. There are a very few out there who know how to make this vehicle work as it can and Paul’s client is the rare example.

    I want to comment on post #1 Midwesterner.

    I happen to agree that some Californians are the Hedonists who thought that their POA’s would help them reap the benefits of the promised land. Not all but some! And for these I have no pity whatsoever! In fact, it serves the San Francisco liberals right (no pun) to get thrown out on their behinds. After all, they are the same people who disdain our military, allow the sacrileges in churches, and look down on the “have nots”. Idiots like poster Michael, #21 suggest we impeach the VP! Real bright! Also it must be the President’s fault, right Einstein? The same San Fran liberals will be seeking a fed bailout and a mortgage freeze if the Dems come to power. Hell, Hillary already said she would “freeze” mortgages.

    The whole point is, people get what they deserve! Shame on the bank for hawking this toxic product for growth and profit. Shame on the borrower who didn’t invest some diligence in exploring what was being sold. Shame on the brokers who unlike Brad, #5, didn’t give a damn what the financial future could bring the client after they left the closing table. There’s hell to be paid, and it’s coming soon.

27. toxic loans on Jan 2nd, 2008 at 4:05 pm

    Here’s a link to a mortgage broker’s website…..some are good guys and some are an example of who should not be in the business…it is scary that they are.

    http://implode-explode.com/forum/viewtopic.php?t=2467&postdays=0&postorder=asc&start=0&sid=f9b1ba3efba0e11fff9d35d0640a7517

28. OptioinsAreGood on Jan 2nd, 2008 at 8:17 pm

    The option arm is a necessary tool with today’s borrower. Self employed or salaried. With people running up credit card debt (18%-21%), no money in the bank and nothing going toward their children’s college education, this product allows borrowers the opportunity to decide where their money goes. I didn’t read anywhere in anyone’s blog about Wachovia’s exclusive Equity Builder feature which allows borrowers to eliminate interest over the life of the loan. No tricks there. The loan re-ammortizes every 14 days, therefore the borrower only pays interest on what they owe. And don’t get me started on fixed rates. If the average borrower is in their MORTGAGE for 5 years, what do you think the effective interest rate is on their wonderful loan? Let’s say the borrower took a $300,000 mortgage at 6.00% for 30 years. That’s a monthly payment of $1,798.65. SOUNDS great, but look at it more closely. The rate is only 6.00% if the borrower stays in the loan for 30 years! If the borrower stays in the loan for 5 years they’ll pay:

    $87,082.16 Interest

    $20,836.93 Principal
    _________________

    $107,919.09 Principal and Interest

    $279,163.07 Balance at the end of 5 years

    Now solve for the true EFFECTIVE INTEREST rate if they’re in the loan for 5 years…

    Type in the numbers on your mortgage calculator

    Type in $20,836.93 then hit loan amount (principal paid)

    Type in 5 then hit term (in mortgage for 5 years)

    Type in $1,795.65 then hit payment key (payment they’ve made)

    Solve for/hit interest key and what do you get???

    Really, 102.84%

    Congratulations on a phenomenal product.

    Now that I just made all of you sick who refinanced out of a fixed rate into another fixed rate…relax. You still have time to take an option arm. Just keep an open mind and talk to someone who will take the time to explain it and show you how to use it as a tool.

    Take care

29. Tom on Jan 2nd, 2008 at 8:44 pm

    hmpierson,

    I hear ya, but I fell in the same mess as Jackie. BUT. in CA my minimum neg ammortization payment is 150% the cost of what rental rates are in the area. One would think that with home prices soaring rental rates would skyrocket also, that hasn’t been the case in SoCal. In my case I’ve been bleeding mortgage payments through the nose much more costly than renting and now I’m about 100k upside down. This is reality for me - stupid yes - but this is the hype I fell into. Four years ago I never saw this coming and now I’m in a real mess due to recast in the next 12 months. I will drown. Reality strikes, I wanted my 14 year old son to have a ‘home’ but now we have ticking time bomb and I am always stressed out and I suppose I deserve it. Thanks for your thoughts.

    Tom

30. paul on Jan 2nd, 2008 at 9:13 pm

    Options are Good

    You are bad!!!!!! Do you sell cars???? Nice creative accounting!!!! The borrower paid 6% on the money he owed…period!!!! I will try and make it SIMPLE FOR YOU!…..If you put 300K in a cd for 1 year at 6%, do you know what the bank would give you at the end of the year??????$18,000 worth of interest…..So if you borrow 300K at 6% , you owe the bank 18,000 for use of the money for the year!!!! So on a 30 year fixed 300k loan @6%, you payback lets say JUST FOR SHITS AND GIGGLES 3000 IN PRINCIPAL FOR THE YEAR(BECAUSE I DO NOT FEEL LIKE GETTING THE PROPER AMOUNT) tHE NEXT YEAR YOU PAY 6% ON THE 297K YOU OWE….YOU DO NOT COMPOUND THE INTEREST RATE!!!!!!

    If I put 300,000 in a CD for 60 months at 6%…do you know what I would have in dollars after 60 months?????? $401,466…Is my rate of return 102%…………. or 6% …THE ANSWER IS 6%

    I hope you are not a loan officer!!!!!!!

31. Sandy on Jan 2nd, 2008 at 9:14 pm

    It is going back to vanilla, no more fruiti tuttie….

    The time of the bank officer as your contact is coming back, and he won’t make a commission, if he makes any “extra” it will be for service and quality. Well, with technology, they may have an on line site that you can apply at home.

    Where is a similar entity like the Resolution Trust Corporation they had in the 80’s when the idiots took over.

    To quote Wikepedia:

    The Resolution Trust Corporation was a US government-owned asset management company mandated to liquidate assets (primarily real estate-related assets, including mortgage loans) that had been assets of savings and loan associations (”S&Ls”) declared insolvent by the Office of Thrift Supervision, as a consequence of the Savings and Loan crisis of the 1980s. It also took over the insurance functions of the former Federal Home Loan Bank Board. It was created by the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), adopted in 1989. In 1995, its duties were transferred to the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation.

32. Sandy on Jan 2nd, 2008 at 9:21 pm

    Whoops, this is a bailout situation, however, this new entity should include law enforcement of imvestigation of fraud and collection of assets from all the fraudulent brokers, appraisers, loan officers, loan “clerks”, etc. to help pay for it. There should also be a “mortgage fraud” tax on these guys instead of jail time. In other words, no jail, but they pay extra taxes every year that goes into the bailout fund. Also community service too… Our jails are too full with other criminals. Hit em where it hurts in THEIR pocket book.. Oh, and throw a few years of probation…. or instead of sexual predator, it could be financial predator, registered. Lets face it, that is what they were.

33. paul on Jan 2nd, 2008 at 9:25 pm

    Sandy

    How about we give them a option arm for life loan….say start rate of 7.5 with 3% adjustment and a 29.99 cap…just so we just stay under the federal rate limit!!!! If they like to sell them, lets give them one!!!

34. paul on Jan 2nd, 2008 at 9:34 pm

    Options are good

    One more point, the 87,000 (@6) in interest in on 300k not the principal that has been paid back!!!!!

35. Moe on Jan 2nd, 2008 at 10:23 pm

    Paul why do you love them so much when you just sell them? The money right?

36. JacMac on Jan 2nd, 2008 at 10:32 pm

    Drum roll please . . .

    Paul????

37. paul on Jan 2nd, 2008 at 10:49 pm

    Option arm=Russian roulett with more than one bullet

38. Virginia on Jan 3rd, 2008 at 3:50 am

    Interesting article re: foreclosure rates per capita per state. It includes a heat map: the pinker the state the more foreclosures per capita. While California does rank #5, the top three states are Nevada, Florida and Ohio. To round out the top ten we also have Colorado, Michigan, Georgia, Arizona, Indiana and Illinois.

    Here is the link to the article and map:

    http://biz.yahoo.com/prnews/071219/law017.html?.v=101

    I guess there are a lot of big boobed, amoral hedonists everywhere….even in the midwest!

39. Virginia on Jan 3rd, 2008 at 4:02 am

    http://www.youtube.com/watch?v=kUldGc06S3U

    Roller coaster ride through real estate prices from 1890’s through 2005…

40. OptioinsAreGood on Jan 3rd, 2008 at 9:25 am

    Hey Paul,

    Nice reply. This is where you lose me though. Anyone who is or isn’t in the mortgage business can tell you that on a 30 year fixed rate the interest is frontloaded, right? Right. That’s why my example isn’t creative financing. Again, they’re not paying at 6% if they’re only in the loan for 5 years. Gotta be 30 years my friend. Try getting your arms not only around the payment, but also how it’s applied. Bashing option arms is the hip thing to do right now. Fine. The lenders who underwrite and appraise the properties properly will sustain this current crunch. There are plenty of people who have and love the loan. Not because they’ve been able to live above their means, but because it’s helped to change their financial future. Why should a self employed borrower be the only one who should enjoy all the benefits that come with payment flexibility? Correct, you don’t have a good answer for that one. That’s why I will continue to be successful. I educate my borrowers. I don’t simply answer the phone and quote a rate. If you take the time to show borrowers all of their options, then you will have repeat customers for life.

41. paul on Jan 3rd, 2008 at 9:53 am

    OptionsAreGood

    In your example you make it seem like you are paying $87000 interest on 20,800 of principal but you you are paying on the right to borrower the 300k .

    Option arm payment choices:

    #1 min payment means neg. am

    #2 interest only..so than what is your effective rate? Same as fixed!

    #3 pay as 30 yr fixed…same as your example

    #4 Most people can’t qualify any other way!

    #5 W-2 EMPLOYEES CAN GET AN OPTION ARM!!!!

    #6 If the client has to sell in less than 3 years, how does the prepay effect them??? If no prepay the paid points at closing…oh I mean interest!

    Option arms work for people who can controll there cash flow,or are able to pay down there principal fast, most people can’t….END OF STORY!!! If these loans are so great why is CA,NV,FL,AZ in such a mess?????? People in loans they never should have been placed into!!!Option arms have there place and I do use them when it is in the clients best interest!

    By the way, the lenders who wrote these loans are gone or on there way out!! WAMU,COUNTRYWIDE,CHEVY CHASE are in big trouble my friend!!!

42. paul on Jan 3rd, 2008 at 2:47 pm

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    Option ARMs are a dangerous option

    When daredevils are about to perform a hair-raising stunt, they often admonish viewers: “Don’t try this at home.”

    We think a similar warning should accompany one of the newer twists in mortgage financing: option adjustable-rate mortgages or option ARMs. Unless you are extremely well-versed about these complex loans, you risk a nasty surprise that could cost you your home.

    An option ARM is a type of adjustable-rate mortgage with as many as four different monthly payment options and, depending on its underlying index, an interest rate that could change every month.

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    In most cases, each month the homeowner gets to choose one of four ways the mortgage check can be treated:

    A conventional 15-year loan in which your payment covers all of the interest and some of the principal.

    A conventional 30-year-loan in which your payment covers the interest and a little less of the principal.

    An interest-only loan, where you pay enough to cover the interest but none of the principal.

    A minimum-payment loan where you don’t even pay enough to cover that month’s interest, with the unpaid portion being added to the principal, which increases the amount you owe. Some loans will even let you skip a payment altogether with the entire interest charge being added to your principal.

    The goal of the option ARM is “to get the payment as low as possible,” explains George Yacik, a vice president at SMR Research, a New Jersey firm that studies the home mortgage market and home equity lending.

    The latest and most deceptive advertising for option ARMs calls them “1% mortgages.” That’s not the real interest rate. It’s just the interest rate the minimum payment is based on. So if the real interest rate is 6%, the additional 5% is being added to the borrower’s debt.

    Amazing as it may seem, some lenders are even promoting their option ARMS as “Negative Amortization Loans,” like that’s a good thing. They’re just counting on consumers not understanding what that means.

    The option ARM is a direct result of skyrocketing house prices across the nation. Since many first-time buyers need help buying their first home, more of them are turning to option ARMs.

    While fewer than one in 100 borrowers took out an option ARM in 2003, more than 12 in 100 did so in 2006, according to LoanPerformance, a company that follows lending trends.

    “Without them, a lot of people would be shut out of the housing market,” Yacik says.

    But lenders often attract borrowers with startling low initial rates of 1% or 2% and the promise of a minimum monthly payment that is far less than any other mortgage could possibly offer.

    Borrowers, especially those who signed up for an option ARM because they couldn’t afford a more traditional loan, could quickly get into trouble when:

    Their interest rate immediately goes up, making their payment options more expensive. Traditional ARMs fix initial interest rates for one to seven years, and then reset once a year. Option ARMs usually begin resetting rates right away and adjustments are made every month.

    They repeatedly choose to make the minimum monthly payment — or skip a payment — adding hundreds, and in some cases more than a thousand dollars a month, to their debt.

    Some ARMS periodically require borrowers to catch up on all unpaid interest as well as any interest that has accrued on that interest with a type of balloon payment.

    Others have “principal caps.” If your debt reaches 110% of what you originally borrowed, the minimum and interest-only options disappear and you have to start paying all of the interest and part of the principal every month.

    Don’t have it? Want to refinance and get out of the loan? Many option ARMS also impose penalties of $10,000 or more if you try to pay them off early.

    So if you don’t understand how an option ARM works in general, and how your lender’s loan works in particular, you could slam into a financial wall in just a few years.

    Let’s look at how different repayment schemes affect an option ARM loan for $100,000 with a starting interest rate of 4.75% amortized over 30 years.

    At the end of the first 30 days, you will owe $396 in interest. If you made the standard monthly payment, treating it like a conventional 30-year loan, you would send the lender a check for $521. That would pay that month’s interest and reduce the total amount owed by $126, leaving you with a balance of $99,874.

    If you treat an option ARM like a 15-year loan and pay $778, your interest would still be $396, and the remaining $382 would reduce the principal to $99,618. Both of the above examples whittle down the principal amount owed and also cover all the interest due.

    But if you choose to make an interest-only payment, such as $396, that means you still owe $100,000 to the lender and have not built any equity in your home. Given that the interest charge could change every month, you also run a very real risk of facing larger monthly payments that don’t reduce the principal.

    Now let’s look at what happens when you opt to make a minimum payment of $200 a month. Since that payment is less than the interest owed, the excess unpaid interest of $196 gets added to the principal.

    In month two, you owe the interest on $100,196. At 4.75%, that is $397. If you make only the $200 minimum payment again, you get the unpaid interest — this time $197 — added to your principal so you would then owe $100,393.

    As you can see, the longer you make minimum payments that do not cover the interest, the larger your debt.

    You end up owing your lender thousands of dollars more than you initially borrowed. You could also face balloon payments or huge monthly payments that you can’t afford on a house in which you have built no equity.

    It’s little wonder that George McCarthy, a housing economist at New York’s Ford Foundation told Business Week that option ARMs are “like the neutron bomb.” They’re “going to kill all the people but leave the houses standing.”

    By Stef Donev

    Interest.com Contributing Editor

    Have a question about your finances? Ask us at editors@interest.com

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    National
    mortgage rates
    1/3/2008 2:42:40 PM

    Fixed ARM Interest Only

    30 Yr Fixed 5.70%
    15 Yr Fixed 5.22%
    30 Yr Fixed Jumbo 6.67%
    15 Yr Fixed Jumbo 6.15%

    3/1 ARM 5.39%
    5/1 ARM 5.48%
    7/1 ARM 5.69%
    10/1 ARM 5.94%

    3/1 ARM (I/O) 5.41%
    5/1 ARM (I/O) 5.52%
    7/1 ARM (I/O) 5.69%

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43. OptioinsAreGood on Jan 3rd, 2008 at 5:50 pm

    Paul,

    I agree that many lenders are in trouble. That doesn’t make it a bad loan. It means it wasn’t explained properly. How can that be the every broker’s fault? It can’t. There are many brokers who take pride in giving their borrowers the best program.

    The option arm is available with no prepay. No one said I made 4-5 points per loan. I do the loan at par with 2 points on the front. I explain to my borrowers that they can get out of the loan whenever they want, but if they choose to they can make a payment that benefits them that month. It’s about flexibility.

    CA, NV, FL and AZ are in trouble because lenders were accepting joke appraisals. Now they’re paying for it. Again, I don’t deal in fraudulent transactions. I don’t have to close 30 loans a month to earn a decent living.

    Believe me when I say that I sleep great at night. My borrowers do too.

    Do yours?

44. paul on Jan 3rd, 2008 at 6:37 pm

    Joke appraisals- yes, lower payment to get into the property- yes, it was eaiser to qualify- yes.

    I never said you make 4-5. I never said you dealt in fraudulent activities… but many brokers do!

    If you pay the min. payment you NEG AM!!! Cost of loan goes up!

    If you make IO payment or a fixed payment you are paying the interest on the orginal loan amount!!!! Same as your 102% effective rate!!!!

    COFI index for Dec. 2007 4.5217+ margin 2.25-2.75…your rate is higher than a 30 yr fixed!!!!

    6 month LIBOR…4.60+MARGIN 2.25-2.75…YOUR RATE IS HIGHER THAN A 30 YR. FIXED.

    How is this better than a 30 yr. fixed????? OR CHEAPER?????

    The effective rate on a 30 yr fixed is not 102%!!!!! I do not know what else to say!!

    WHAT DOES EVERYONE ELSE HAVE TO SAY ABOUT THIS???
    WOULD LOVE TO HEAR OTHER PEOPLE HAVE TO SAY!!!!

45. JacMac on Jan 3rd, 2008 at 7:28 pm

    “I explain to my borrowers that they can get out of the loan whenever they want,” — Optionsaregood, I have a question.

    How can that be true, when the banks have change all of their programs and the value of homes are dropping like flies?

    As your name hints, if the options are good the consumer should be able to choose from some good options, get themselves into a better loan or a loan that keeps them in the same financial position — not true for many OPTION ARM holders or subprime loan holders, IMO.

    Homeowners with those loans are are in extreme danger of losing equity at every minute.

46. paul on Jan 3rd, 2008 at 7:44 pm

    Optionsaregood

    As you have stated in earlier post…people with credit card debt18-21%, no money in the bank, no money for the kids college education…this products allows the borrower the opportunity to choose were there money goes…….WHAT?????? If they have no money, credit card debt, no money for the kids….MAYBE, JUST MAYBE THEY SHOULD NOT BUY A HOUSE!!!!!!!!! Just a thought!!!!!!!

    Just my opinion.

47. zed on Jan 3rd, 2008 at 7:55 pm

    Option Arm = Russian Roulette with an auto and one in the chamber

48. JacMac on Jan 4th, 2008 at 3:59 pm

    AND THE PLOT THICKENS: (As investors get hit in the pockets, we’ll see a large CRY for change, I bet ya)

    “The State Street Corporation, which manages $2 trillion for pension funds and other institutions, ousted a senior executive on Thursday and said it would set aside $618 million to cover legal claims stemming from investments tied to mortgage securities.
    Skip to next paragraph
    Photographs by Boston Portrait

    James S. Phalen, left, will succeed William W. Hunt at State Street.
    Related
    Times Topics: Mortgages and the Markets</