By John Rebchook, Rocky Mountain News March 3, 2007
Mortgage. The word alone is enough to strike fear in the heart of a home buyer. But forget fixed-rate 30-year mortgages. Forget ARMs. A grab bag of confusing and often risky new options awaits. A primer of terms, checklists and red flags can help you avoid an even more terrifying word: foreclosure.
Thousands of Denver-area homeowners are facing the loss of their homes, at least in part because they are saddled with risky loans.
Prepayment penalties, negative amortization, balloon payments, interest-only loans, loans with no down payment, short-term teaser rates, option ARMs.
These are among the red flags consumers should watch for when making what typically is the largest purchase of their life.
While not the only reason more than 19,000 homes entered foreclosure in the Denver area last year - a record in total numbers and the second-worst year ever on a percentage basis - the loans are exacerbating an overall flat real estate market.
Mortgage broker Jim Spray said it is easy to tally how many bad loans are in the Denver area.
"Just look at the 19,000 foreclosures," he said.
On Wednesday, Spray counseled a woman who was about to lose her home because of an ARM that she could no longer afford.
"I did something I have never done in 30 years in the business," Spray said. "I put her on the phone with her minister so they could pray."
Speaking recently at the state Capitol, where he was preparing to testify for a bill to license mortgage brokers, Spray said if loans didn't have hefty prepayment penalties, the number of foreclosures would be cut dramatically.
It is not uncommon for people to be stuck with high-interest loans because they need to pay $10,000, $20,000 or more to refinance into a much lower market-rate loan, he said.
If they could refinance into a market-rate loan, now hovering at around 6 percent, they would be able to afford their payments, he said.
Ed Jalowsky, a real estate broker who specializes in selling distressed properties, said that 90 percent of these deals had ARMs, many of which are adjusting upward by thousands of dollars.
"I would tell people to get into a fixed rate," said Jalowsky of Classic Advantage Realty. "It's too easy to get into these ARMs. They get you in with these low rates, but in a year or two, you can't afford them."
Real estate broker Carolyn Sandberg specializes in "short" sales for lenders, in which the lender takes less than the mortgage amount in exchange for the house.
When homeowners miss payments, some lenders don't hesitate to play hardball with them, she said.
Sara Hays, a broker associate with Metro Property Brokers in Greenwood Village, works with Sandberg on short sales.
"Every single short sale we have done has been with someone with a bad ARM," Hays said Friday. "ARMs are only appropriate for a very sophisticated buyer."
She said the problem is that when the lender explains that the monthly payment will be low for only two years, buyers aren't listening.
"All they are hearing is that their monthly payment will be $740," Hays said. "Two years comes around fast. It only takes one thing - the loss of a job, a divorce, an illness - and they fall behind."
Sandberg said some first- time home buyers are so stretched that if they find themselves out of work for even two weeks, they fall behind.
Hays believes that buyers should only be using about 30 percent of their gross income on their mortgage. Often, buyers meet that ratio when they get the ARM with teaser rates, but the lender doesn't explain to them that they will be much more financially strapped when the payments rise, she said.
"And some people shouldn't be homeowners," Hays said.
Both she and Sandberg, often with Universal Lending, sponsor free workshops to prospective buyers on homeownership.
Zach Urban, who heads the Colorado Foreclosure Task Force, which was launched in October by the Colorado Division of Housing, said he is seeing inflated appraisals accompanying some ARM loans.
And sometimes homeowners are involved in the fraud by lying about their income, he said.
Urban, a foreclosure counselor at Brothers Redevelopment, said a hotline set up by the task force has received more than 9,400 calls, and he expects the number to hit 10,000 in mid-March.
"There are a lot of people signing things, and they don't know what they are signing," Urban said.
People who buy homes with little or no down payment are at the greatest risk of losing their homes, said Lou Barnes, co-owner of Boulder West Financial Services.
If home prices had been rising, the loan type would have far less impact, he said.
"We have had flat to declining prices in the foreclosure belt north and east of Denver," Barnes said. "Prices today are basically where they were at Christmas 2000. But if you get some reasonable appreciation, it protects people who made small or no down payments."
Barnes said other formerly hot real estate markets such as California, Nevada and Florida could be facing the same kind of foreclosure crisis as the Denver area.
But it won't happen overnight, he said.
"One of the best lessons of Colorado for the rest of the country is that our real estate market went flat in 2001, but we did not really start to see the rise in foreclosures until 2003," Barnes said. "Since 2003, foreclosures have been compounding 30 percent or 40 percent each year."
Navigating the home loan maze
• Prepayment penalty loans
You might not have the money necessary to prepay the loan, and you would not be able to refinance.
• Negative amortization loans
Who wants the loan to get larger even as you make payments?
• Interest-only mortgages
These loans should be seen as an investment tool for financially secure borrowers, not as a way to stretch to buy the biggest house.
• "Teaser" rate loans
Much like ARMs, when the short-term teaser rate expires, you could pay a higher rate than you can afford.
• Refinancing into an adjustable rate mortgage
An ARM could be lower at first but then go higher than a fixed-rate. Unless you are sure you will pay off the loan before the ARM adjusts, stay with the safety of a fixed-rate. This is especially true today, when there is little difference in rates between ARMs and fixed-rate loans.
A closer look at the mortgage business
Glossary
• Adjustable rate mortgage: A mortgage in which the interest rate changes periodically, according to corresponding fluctuations in a particular index.
• Balloon payment: The final large lump sum payment on a mortgage due at the end of a series of smaller payments.
• Foreclosure: When a borrower in default on a mortgage loses the interest in the property to the lender. The legal process usually involves a forced sale of the property at public auction with the proceeds of the sale being applied to the mortgage debt.
• Interest-only loans: A nonamortized loan in which interest is due at regular intervals until maturity, when the full principal on the loan is due.
• Negative amortization: Unpaid interest is added to the total loan amount, increasing the outstanding balance.
• Option ARMS: Each month a borrower can make the full principal and interest payments, pay interest only or make a minimum payment. Those who choose the minimum payment pay no principal and less interest than what accrues on the loan. If borrowers continue to make the minimum payment, their loan balance will grow.
• Point: A fee that is equal to 1 percent of the loan amount. Points can lower the mortgage interest rate.
• Predatory lending: When a lender makes a loan knowing that it is highly unlikely that the borrower can pay it back. Often, they are associated with high-interest loans and deceptive practices.
• Prepayment penalty: A fee charged to a borrower who pays off a loan before it is due.
• Short sale: A lender accepts less than the mortgage amount, avoiding a lengthy and costly foreclosure. The homeowner still loses the house.
• Stated income loans: A mortgage that requires little or no documentation. It does not require such items as a list of all creditors, two or three paycheck stubs, W-2s, income tax returns and bank statements.
Choosing a lender
• Check with several lenders.
• Choices include thrifts, commercial banks, mortgage companies and credit unions.
• Mortgage brokers arrange transactions rather than lending money directly, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. So you may want to interview several mortgage brokers.
• Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.
• If you choose an ARM, find out how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.
• Pay attention to the annual percentage rate, or APR. The APR takes into account not only the interest rate but also points, broker fees and certain other credit charges that you may be required to pay, expressed as a yearly rate.
• Check your local newspaper and the Internet for information about rates and points.
• Ask for points to be quoted to you as a dollar amount so that you will know how much you will have to pay.
Foreclosure bills in the legislature
Highlights of the latest foreclosure bills sponsored by Sen. Peter Groff, D-Denver, Sen. Ken Kester, R-Las Animas, and Rep. Rosemary Marshall, D-Denver.:
• Would require mortgage brokers to be licensed, not just registered with the state.
• Defines grounds for revocation or suspension of license.
• Authorizes the director of the Colorado Division of Real Estate to impose fines and issue letters of admonition.
• Makes a broker's employer liable only if the employer knew of the wrongdoing by the broker.
• Requires all documents related to a mortgage loan on residential real estate provided to the borrower at least two business days before closing.
• Gives the borrower a right to rescind the transaction if any material is misstated or restated.
• Prohibits any attempt to waive a borrower's homestead rights for the property.
• When refinancing, prohibits any attempt to give a mortgage broker - or any other person connected with the transaction - a quitclaim deed to the property or power of attorney.
Mortgage questions
In trouble, these resources can help:
• Foreclosure Hotline: 1-877-601-HOPE
• FHA Resource Center: 1-800-225-5342
• For a complaint about a real estate broker or mortgage lender: http://www.dora.state/.co.us/real-estate/Complaints/Complaints.htm Source: Federal Trade Commission Foreclosure Bills In The Legislature Highlights Of The Latest Foreclosure Bills Sponsored By Sen. Peter Groff, D- ...
More red flags
•Loans with a balloon payment
Only appropriate for the most sophisticated borrowers. You may need to take out a new loan, with additional fees, when the balloon is due to finance the balance.
• Blank spaces on documents
The lender can fill in anything he or she wants, such as the interest rate.
• Promise of a free appraisal
Why? Free appraisals could be a scam. The appraiser may be in cahoots with others in the process who have agreed to inflate the value of the home so you can get a loan. Such appraisers may not even look at the property.
•No-down-payment loans
Why? If you haven't put money down, you could wind up owing more on the house than it's worth, a challenge if you have to sell the house after only a few years.
• A lender who makes promises but not in writing
You might not get what you were promised.
What the professionals are saying
"I've dealt with some lenders who are truly the lenders from H-E-double toothpick."
Carolyn Sandberg Home Real Estate in Westminster
"Some of these lenders are heartless, absolutely heartless."
Jim Spray a mortgage lender who has long advocated stricter controls on his profession
"When there is money involved, schemes get pretty sophisticated."
Zach Urban a foreclosure consultant at Brothers Redevelopment, who runs the Colorado Foreclosure Hotline
rebchookj@RockyMountainNews.com or 303-954-5207
For More Mortgage Info go to http://www.ColoradoDreamHomes.net
No comments:
Post a Comment