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October 11, 2005

Mortgage Abuse?

Amey Stone

I wrote a story earlier this month about how your stock and bond portfolio -- not just your home's value -- could take a hit if the real estate market crashes. See, "If Housing Slumps, How Safe Are You?

You may be more exposed than you think, especially if you own financial-services and consumer stocks. Better take a close look at your bond funds, too."

I link here to the story, not because it's such a great piece (okay, it's not half bad), but mainly to draw attention to an interesting reader response. To save you from scrolling down through the comments, here's the one that took my breath away when I read it:

I am a lawyer and I represent illegal aliens in deportation. In all but one of 35 cases I currently have on docket the illegal owns a home. But it is the loan terms that fascinate me. One lady finished school at second grade, speaks no English, and works for a recycling company binding cardboard boxes. She makes about $30K per year and is a single mom with three children. She has a $430K interest only loan that she used last year to buy a $430K condo - 100% financing - she paid $3,000 in closing costs. I tried to explain that her monthly payments will rise substantially in four years. She does not believe me, did not understand what I said and told me the loan and real estate agents specialize in real estate and would have told her if her payments could go up. If 34 of my clients with risky loans and no school past at best eighth grade are surprised by rising loan payments, we should be afraid. This is the last group desperate lenders pander to, meaning we're near the end.

Yikes! I find this both frightening and depressing. I hate to think of all the hard-working people who may lose their homes in a few years because they trusted their lender and/or real estate broker.

04:20 PM

Affordability

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Yikes is right! How awful! I am sure that this is an extreme case, but there is certainly a lot of irresponsible lending going on these days.

Here in Michigan I am seeing a lot of Negative Amortizing Option ARMS being "sold" to people. How horrible in a flat and/or decreasing Michigan market.

David Porter, President of Pacesetter Mortgage

Posted by: David Porter at October 11, 2005 08:33 PM

I would like to know 1) how an illegal is making $30K - more than I am, a college grad working a universities 2) how she can afford $430K making $30K with 2 kids. I can just barely pay my rent which is below market value + save money.

Posted by: Anonymous in Chicago at October 12, 2005 10:40 AM

As I said in an earlier comment, I'm looking forward (sarcasticly) to the Congressional inquiries into the mortgage industry and what went wrong with the housing market.

Should provide some interesting news but the real result will be more finger pointing and no accountability for anyone, except rising costs and red tape for middle-class Americans who are trying to make it by.

I see a future of documentation out the wazoo to get a simple 30-year fixed rate home loan for someone with 20% downpayment making $150k a year buying a $200k house. Look what SOX has brought onto us because of the abuses of some executives.

The results will be far more reaching than the stock market bubble due to the sheer numbers of people who own houses (~70%).

Posted by: Wes at October 12, 2005 11:04 AM

What kind of lawyer freely divulges the financial information of his clients?

Posted by: Brian R. Smith at October 12, 2005 01:06 PM

http://appraiserspetition.com/

Take a read on the following website. Its valid proof that the housing boom is built on lies deception and fraud. You have over 8500 people who will atest to facts. Businessweek should run a story on the practice by realtor on pumping up the prices. It will make Enron and Worldcom look like a cakewalk.

And I quote..

"Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value."

From the website...

The concern of this petition has to do with our "independent judgment" in performing real estate appraisals. We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States, who seek your assistance in solving a problem facing us on a daily basis. Lenders (meaning any and all of the following: banks, savings and loans, mortgage brokers, credit unions and loan officers in general; not to mention real estate agents) have individuals within their ranks, who, as a normal course of business, apply pressure on appraisers to hit or exceed a predetermined value.

This pressure comes in many forms and includes the following:

the withholding of business if we refuse to inflate values,

the withholding of business if we refuse to guarantee a predetermined value,

the withholding of business if we refuse to ignore deficiencies in the property,

refusing to pay for an appraisal that does not give them what they want,

black listing honest appraisers in order to use "rubber stamp" appraisers, etc.

Posted by: Peter Hamilton at October 12, 2005 01:11 PM

Lenders Clamp Down

On Inflated Appraisals

http://homes.wsj.com/buysell/mortgages/20050527-simon.html?mod=RSS_Real_Estate_Journal&rejrss=frontpage

By Ruth Simon

From The Wall Street Journal Online

With home prices climbing at a double-digit pace in many parts of the country, lenders are increasingly worried about inflated appraisal values -- and some are taking steps to clamp down.

Posted by: Another Post at October 12, 2005 01:19 PM

I asked another forum about this, and it was reported that Banco Popular gives these type of loans. They include the "other" working adults in the household, although there's just "one" person on the deed. Doesn't sound right according to the article. She's a single mom, no husband no uncle no mother mentioned, but it's possible there are grandparents living in the home with her. Still want to know how she can afford $430K on 30K salary -- and it's a condo! for god's sake, not a house but a condo.

Posted by: Anonymous in Chicago at October 12, 2005 04:27 PM

That is really bad, lke the checks/(high interest loans) sent in the mail to people who live from paycheck to paycheck. But, hey, I've had lenders (2 in fact) not disclose all of the info to me until the very last concievable moment (apon signing the laon). One failed to tell me that the loan was variable, and the other failed to tell me that the rate had increased 1%. It was really too late to back out of either one.

Posted by: km at October 12, 2005 04:43 PM

Chicago anon...

Housing cleaning. $30 an hour and usually all income is not reported for taxes. $30 X 40 hours a week = 1,200 X 52 weeks a year = $62K

Posted by: Joey at October 12, 2005 06:16 PM

To the poster who wondered how an illegal was making $30K a year, perhaps the lady has multiple jobs. Working two full time jobs at minimum wage would put one close to $30K in many states. If she earns more than minimum wage, then she may even just be working one full time and one part time job. The point is, she may not be making more than you, she may just be working more hours.

Posted by: Boston Bubble at October 12, 2005 07:59 PM

Any sucker that makes $30,000 per year and buys a $430,000 condo with 100% financing not only will lose her home but also deserves to lose her home, period.

A 30 year 430K interest-only loan at 5% ARM for 5 yrs is going to amount to about $1800/month. That's roughly 21K/year. How can you pay out 21K yearly for your mortgage when you only gross 30K/year??? Doesn't make any sense, does it?

Posted by: anonymous at October 13, 2005 12:21 AM

Well, Brian, no names were mentioned along with the financial information!

Posted by: Libad at October 13, 2005 09:58 AM

Only big loser is the Lender. If the illegal making 30K can't pay, she would be foreclosed and just loose 3k down payment. Anyway, illegals face several risks-- forclosure is just another such risk!

Posted by: Anonymous2 at October 17, 2005 05:21 PM

I am making 60K a year and am sitting on a mortgage of about 75K (bought my house in 1988). My payments take a big enough hunk of my income, what with the cost of utilities, etc. Because I live modestly, I can afford a few luxuries, like vacations abroad and monthly savings for retirement. I cannot even comprehend why in the world would anyone want to buy a house/condo that costs 430K on an income of 30K a year. There cannot be much left over for anything else, for sure. And, how in the world did she qualify?

Posted by: Frugal at April 15, 2006 11:23 AM

I am making 60K a year and am sitting on a mortgage of about 75K (bought my house in 1988). My payments take a big enough hunk of my income, what with the cost of utilities, etc. Because I live modestly, I can afford a few luxuries, like vacations abroad and monthly savings for retirement. I cannot even comprehend why in the world would anyone want to buy a house/condo that costs 430K on an income of 30K a year. There cannot be much left over for anything else, for sure. And, how in the world did she qualify?

Posted by: Frugal at April 15, 2006 11:24 AM

This is very common... the (stated income) 2-year interest only and the pay option arms will be causing some significant challenges for homeowners.

The are moving forward making their payments... all of a sudden they receive a notice, that their loan is adjusting because the two year interest only period is up. They are going from 4.5% IO to a 6.5% fully amortized 28 year loan. (We have mortgage calculators for each type of loan: http://www.forsalebyownercenter.com/tools/ to view exact increases)

Payment increases by an average of 60%, they miss making the first mortgage payment on time (because they don't have any savings as evidenced by recent national study). Now they have a 30 day mortgage late... guess what, can't get a mortgage loan anywhere now. They end up going straight to foreclosure. In California these IO loans represent over 40% of all loans over the last two years. Things can and very well may get very ugly.

Posted by: For Sale by Owner Center at April 25, 2006 01:41 PM

I am making 104k/yr before taxes, im 22 years old, and just bought a $300,000 condo, with my monthly dues for living here totaling over $2,600. I didn't go to college, and at work i sit on my ass all day and chat with friends on messenger, or download music, and occasionally attend a meeting or two a week. Anyone want to take a guess at what I do, and what company I work for?

Posted by: Preston at August 14, 2006 05:00 PM

I am a real estate appraiser, and I have taught myself not to give a predetermined value to the banker. Three times a week after I have completed the appraisal I get this bankers who turn into a monster. Its like a pitch they learn in some institution, it goes as follows. For example they say on the report I requested a value Of $550,000 and unfortunately the appraisal came in at $470,000. The broker says I would have prefered you call me and let me know. I may not have had the report done at all. An underappraisal of $80,000 was definitely serious enough to kill the deal. So theyu are saying they would have found another appraiser to break the law. Three times a week minimun I receive this. Followed up with threats to place harm on my license or my fees. What is so crazy about all this is that values have never been higher due to the bubble, and still they need a higher value to pay for their fees. Every day I feel a little more bitter in the way Americans are treating each other.

Posted by: Andres B. at August 31, 2006 11:35 AM


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