There’s always something to howl about.

Sleazy Option ARM Advertisements

I wrote this article on Active Rain, about two months ago.  It’s got legs in the comments’ thread over there.  You’ll see that the REAL reason I’m worked up is that the “new sleazy option ARM advertisement” is to claim that you KNEW it was bad for the customer. The opposite is actually true

I’m pretty high-touch with my neg-am borrowers.  I keep in close contact with them quarterly.  I just received notice that one of them had a notice of default filed against them for non-payment.  The borrower lost his job and elected to use the “side account” he established, from the monthly cash-flow savings, to rent a new home rather than to “feed the depreciating asset” (his words).

Before you comment on the article, you might read all of Dan Green’s “Mortgage Planning” articles.  if you haven’t the time to read all of them, read:

If Low Downpayments Are More Risky To Banks, They Must Be More Safe For Home Buyers

I’d argue the same logic applies for negative-amortization (rising mortgage balances).

Here’s the article:

Remember the “sleazy Option ARM advertisements“?

They’re back but with a whole new twist:

This is why I never did option arms.  This is part of the reason why we are in the housing mess we are in.  Yes, borrowers have to claim responsibility, but every Bank that pushed neg am as a financing alternative deserves the billions in write downs and losses in stock options that they are mired in.  I have no sympathy for them…only contempt!

Oh, brother! If I see one more loan hack Monday morning quarterbacking this mess I’m gonna puke.  There is nothing wrong with negative amortization loans; there was something drastically wrong with the way they were prescribed.  The “new neg-am” advertisements are “posited indignation” and they’re just as sleazy as the original advertisements.  They prey upon the opposite of the greed motivation; fear.  That ain’t helping anybody!

Let me try to break down the negative amortization loan for you:

  • There is an interest rate charged; it may be adjustable monthly, annually, or for a specified period.
  • There are payment options.  One option is LESS than the interest assessed for the month.  Borrowers have the “option” to pay the minimum amount or a higher payment.
  • The difference between the lower amount paid and the higher amount assessed is added to the loan balance.  The loan balance rises or amortizes “negatively”.
  • If that balance rises to a pre-determined amount (usually 110% to 125% of the original balance), all bets are off; the loan becomes a fully-amortizing loan and the payment goes up…a lot.

Neither the neg-am loans nor the banks caused the housing mess; a supply and demand imbalance, combined with an adolescent nature towards understanding complicated loan products (by both borrowers and originators) did.  I’m gonna help you out with this.  Neg-am loans are neither good nor evil; they’re just financial instruments.  When prescribed properly, they can be a super-charged problem solver or liquidity builder BUT…you gotta do your homework, first.

When does a negative amortization loan make sense for you?

How about when you’re looking to buy in a soon to recover market?  NAR Chief Economist, Lawrence Yun believes that a V-shaped spike is due in three markets:

Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas City, Mo., area – are likely to experience home price gains in the 20 to 30 percent range over the next five years, while markets like Miami, Las Vegas and Phoenix could see prices go up as much as 50 percent during that time period, Yun said.

If you’re looking to buy a $300,000 home, with $150,000 down payment, in Las Vegas, you might consider buying a rental property in Phoenix, for $150,000, as well (geographically diversify).  Spread the $150,000 over both homes and use a negative amortization loan to keep your payments affordable, for the recovery period.  You might sell the Phoenix rental for $225,000, in 2013, and use the extra $50,000 to pay down the Vegas loan under $100,000, in 2013.  That’s what wealthy people do.  They buy low and sell high and the do it with other people’s money.

Maybe you’re saddled with debt and no lender is going to let you refinance with “cash-out”, you might need a negative amortization loan.  Let’s assume you’re paying $2,200/month on your $300,000 fixed rate loan and $800/month in $40,000 in consumer debt (credit cards).  In 3 years, your mortgage balance will drop to $290,000 and your credit card balance will drop to $27,000.  If you took out a neg-am loan, with a $1,400 payment, and applied the $800 cash-flow savings to your credit cards, you’ll pay OFF your credit card debt in 3 years.  You will have INCREASED your mortgage balance some $15,000 but you’ll be swapping 14% debt for 6.5% debt.

In the existing scenario, you’ll owe an aggregate of $317,000 in 2011.  With the neg-am loan, you’ll owe an aggregate of $315,000 (on your mortgage) but your high-interest consumer debt will have been retired. Your credit score will most likely have risen, making your eligible for a MUCH better loan program.  Oh, you’ll save a bunch of money on taxes, as well.

Finally, maybe you have no liquidity (we call that cash in the bank in financial planning circles).  That’s VERY dangerous !  Investing that $800 monthly difference (if you have no consumer debt), can grow to a $35,000 nest-egg (assuming a 7% return). While the difference in mortgage balances will be $25,000 higher, with the neg-am loan, the investment account will have grown to $35,000; you’ll be ahead some $10,000 and have what we call in financial planning circles, liquidity.

Oh…by the way…liquidity=safety. When the dung hits the blades, cash in the bank is king !

Here’s the advice for today; don’t be swayed by the fear mongers of today; you weren’t swayed by the greed merchants of yesteryear.  Do your homework, perform your due diligence, and call a mortgage adviser who has financial planning background.  He’ll analyze ALL of your assets and liabilities, and tailor a loan solution specifically for your situation.

After all, aren’t you special enough to warrant personal attention?