Tuesday, April 1, 2008

Legal Con-Man-Made Mortgage Crisis--Careful it does not Gobble You Up

--House Flippers have no Bill of Rights--Neither do you if you are Caught up in the Mortgage "Reset" Tide

You are not a house flipper--one who buys "fixer-upper" houses, does that, and resells for profit. You need a mortgage to secure purchase of your dream home--for yourself and family, to live in, happily ever after. You visit a mortgage broker to help you put the vital financial link into place. The fact that you find yourself talking to a 22-year old, sporting lip, nose and ear rings, is somewhat upsetting, but your urgency makes you look past this--as well as the jeans and halter top he is wearing which only partially cover the plentiful tattoos.

Your needs propel you. You ride right on past the flashing red lights and alarm bells ringing out at you, shouting think, think. slow down, stop, stop. You ignore such ominous signs as the January slump of 11% in U.S. home prices, a record 1-month drop, swallowing up home owners' equity, and the collapse of the 5th largest investment bank in the country, Bear, Stearns

You get the mortgage, which is adjustable rate--meaning your initial monthly payments of $1,500 quickly jump to $2,200 once the trip wire--follow-inflation clause in the contract--is sprung. You are not a happy camper. You now feel that your choice of a mortgage broker was about as wise as picking an expert on bomb demolition with the stature of a Rosie O'Donnell.

Most home buyers think the mortgage broker represents them. Wrong. Except for California, In every other US. State representation is unclear and not articulated. In fact, many financial institutions recruit mortgage brokers to steer loans to them. Thus, you could say the mortgage broker more closely represents the financial institution involved.
When this realization fully hits you it is about as shocking (as we've said before) as picking up a vintage copy of the Saturday Evening Post with a cover picture of Norman Rockwell beating up a child.

This past year--the year of the real estate market collapse--has been dominated by a process: These new-era mortgage brokers have been steering borrowers with weak credit into "reset" loans--like the trip-wire action you incurred when your monthly payment was blown from $1,500 to $2,200. Now, here's the kicker. It's buried in the fine print you didn't read when you signed on: These ARMs (Adjustable Rate Mortgages) carry steep penalties if the borrower tries to pay off the loan before it resets. This is the "trap." This clause makes it near-impossible for you to pay off the loan before it shifts to punishing high interest Docility is the name of this game, and lenders everywhere are fully aware of it. Legalese strung throughout the contract wins the day, leading to widespread neglect and / or misunderstanding. Mortgage Brokers and Home Lenders are fully aware of Murphy's Law: The more crap you put up with, the more crap you are going to get. Thus, they pile on, feed the fires accordingly and relentlessly.

Hence, multiply this scenario--this "trap"--by 1,500,000 or more cases of home owners about to be foreclosed upon, and, voila, you have the makings of a market panic. It's this kind of "drive by" lending that has paved the way for the real estate calamity we face today--a market mess so bad that it is threatening to pull down our entire economy and throw us all into recession.

Ethical, no, but, legal business dealings? Yes, technically. Even though such dealings seem to be along the lines of Canada Bill Johne's Motto: It's morally wrong to allow suckers to keep their money.

20 comments:

Bern said...

Incredible screwups, these mortgage reset traps. How did we ever get to this current housing mess? Have lenders gone off their rockers?

Jack Payne said...

"Have lenders gone off their rockers?" Great question, Bern. You'd certainly think so. Two years ago, when no-down-payment mortgages passed the 50% mark in California--from 7% five years earlier--I figured the RE bubble was about to burst. Sure enough. Now the pin has been shoved into it.

Gene Kranik said...

This is startling. It's getting to the point where on anything having to do with money I don't trust anybody any more. Where does all this madness end? It seems that life is turning into just one con job after another. How do we protect ourselves?

McAlee said...

I know a house flipper who has made a bundle of money over the past several years, but not now. Now he is crying bloody murder and has suffered big losses on his last two flips.

Jack Payne said...

How to protect yourself, ah, yes, Gene, that is the big question. With the F.B.I. so tied-up busy with terrorism these days, and with so many big state agencies heavily into drug, terrorism, and crime syndicate money laundering, enforcement help is indeed spread thin.

Best way to protect youself in this absense is to study up--learn all you can about what con games are being played, and how they work, so you can better protect yourself. This Blog is here for that purpose. Comb the Archives. There are more than 50 articles here. I would just bet there is something in this library that might be considered by you as especially important subject matter to learn.

Also, (shameless plug), my book, Six Hours Past Thursday, gives you a deep, probing psychological portrait of how a con man thinks. With every corner of the con man mind analyzed in depth, this, alone, should fortify you with knowledge about how to recognize, and cope with, a con man when you encounter one.

Jack Payne said...

Yes, McAlee, house flippers have taken a bad beating. Few rewards for this in the offing these days.
I would think the best hope for house flippers now would be to figure some way to "sell short," as is done in the stock and futures markets.

FLOOG said...

Neat post Jack as always.
Informative and startling in equal amounts.

Over here in the UK, the housing market is just starting to suffer and a lot of people have burned their fingers in the quick profit refit and resell markets.

Lenders don't help the situation much. When I bought my house they gave us 2.5 times our joint income. These days, I have heard of 7 times the joint income which inevitably leads to repossession.

We also have repayment and endowment mortgages, the latter meaning lower payments, but a real chance of a shortfall at the end of the loan so you then have to pay an additional sum to make the house yours (in the smallprint but rarely mentioned by the lenders).

You are also only paying off the interest for the first number of years.

It's a mine field

Terry said...

Do con men really think like that? It's morally wrong to allow suckers to keep their money? If this is true...and this is standard operating procedure...we are all in deep doo-doo trying to fend these people off.

Warmer said...

When these adjustable rate thingies came on the scene some years back I thought they would lead to trouble. It's nice to be right on something now and then, even though it's painful for all those involved. At lease I talked a good friend out of one of these, for which he is grateful today.

Kadamanian said...

A pox on all their houses.

Jack Payne said...

So, the U.K. version of the U.S. Adjustable Rate Mortgage is back-end load specials, eh, Floog? Sounds like this form of contract also features the same eyeball-bleeding, fine print angle. This type contract should also lead to a crisis boiling point.

Terry, I try over and over and over again to pound this point home: when doing business with a con artist, you are dealing with a sociopath, one without any conscience whatever. It figures that such a brazen, arrogant attitude would be the natural outgrowth of such a personality. Best thing you can do is learn, prepare, so you will be well-armed to protect yourself when the need arises.

You were right on, Warmer. I recall my gut reaction when these hideous things (ARMs) were introduced some 15 years ago. I thought to myself, "Oh, oh, trouble, trouble, trouble." Apparently you saw this coming, early, too.

I take it the "pox" you are talking about is the lenders' houses, right, Kadamanian?

Chelle B. said...

Never, ever, ever sign your name to something you don't fully understand.

Ever.

The banks need to be held accountable, don't get me wrong, but I have a hard time feeling sorry for people who fail to even try to understand what they are getting themselves into, especially when, as you point out, red flags pop up left and right in the process.

Ignorance is no excuse when it comes to the law, and a mortgage is a legal contract, right?

L.W. Chappel said...

I agree on one thing. Where is the line drawn? Where does the lender's responsibility to make a good, fair loan stop, and the mortgage-seekers responsibility start?

Dee said...

chelle as a lawyer I wanted to get my own home when I was young and I signed up to one of those ARM mortgages as I could afford only those low interest payments but I read every single word as the mortgage company ain't letting you any wiser. I got one where I started payment towards principal many years later by which time I figured my law earnings would allow me to continue.

Well it turns out that after a while it worked and you know what I even refinanced and converted to a fixed rate mortgage.

The ARM mortgages are workable for few people (hawkish lawyers who know lenders are selfish beasts) and only where the economy can sustain it. Like Jack said the brokers aren't representing you. As for lending to those whose earnings don't merit it. Thia is just plain crazy. So now they have these houses on their hands. What are they doing with them?

Damn maybe I should head over the US maybe I can pick up a home for one grand.

Jack Payne said...

What we've all gotta remember is that there are 2 sides to every coin. So, looking at the flip side of this one, on the Lenders' side of all this is the fact that they have been hammered, unmercifully, over these past 15 or so years, to make questionable loans to highly questionable borrowers. An anti-red-lining crusade has long been a hue and cry in the U.S. Congress.

Chelle and Dee, my own suggestion of a remedy--the very best one--would be for the politicians to back out of this kind of interference and let the free market work. Free market mechanisms, if left unencumbered, will do just that--right the ship, straighten everything out.

The Muse said...

Thankfully we did not get sucked in by the ARM. What's getting us is our escrow--taxes, insurance, and the little whatnot's--keep rising. This makes the mortgage jump a little every year.

We got a letter from our mortgage company. They said there would be yet another increase this year to keep up with a rise in taxes. We dove in deeper to see exactly where this rise originated. Our appraisal went up so the taxes increased.

I just don't see this. We live in a modest home. We have not made any remodeling improvements, aside from some landscaping. But the appraised value went up. (We are going to fight the appraisal this year.)

However, if we wanted to sell we would not get that number. A real estate friend said that one used to be able to get the appraisal plus about 15 to 20%. That's not happening anymore. Now you are lucky to get just your appraisal.

She says it's because of all the new construction. Builders are offering deals that make older houses on the market stagnate.

Then the flippers come into play. They buy the older homes with low-ball offers, make them look new again, and sometimes make a profit.

With everything going up, and incomes staying the same or decreasing, people just aren't making it.

Sorry to rant and get off topic. I'll try to just read next time.

Take care.

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