Monday, August 13, 2007

Predatory Lending - a detailed look

Like any homeowner, I get lots of refinance offers that I don't need. The difference is that before it gets recycled, I'm prone to read the fine print to spot the catch. Over the years these offers have been getting more and more outrageous the closer to bursting the housing bubble got. Now that there is no longer a bubble and foreclosure rates are increasing I'm still getting them and they are just amazing.

Personally these days I think it's safer to arbitrarily wander into any car dealership that deal with these loans as you don't have to be nearly as savvy. Interestingly though the mortgage lenders are taking a page from the car salesmen: Emphasize a low per month payment. The thing that makes these riskier than buying a car is that these are "teaser rates" they are going to almost certainly go up as only when the market interest rates are falling will the rates go down. What's really cool for the lender is that with Adjustable Rate mortgages that are tied to a standardized index, they can honestly say they don't know what the rates are going to do (how convenient).

So I get this offer from "Customer Service Center" (won't even use their real name - hmmm)
in Rancho Cucamonga, CA.

What caught my eye immediately is that they capitalized the word "FIXED." Now if you're familiar with these offers they almost always are Adjustable Percentage Rate (APR) as that way they can make the payments low to begin with, Fixed Interest Rate loans are almost always more expensive looking to begin with as they don't change over the life of the loan. Could this really be a Fixed Rate offer? The answer is "Yes, BUT(!)"

The Program is called "FIXED Pay" and it quotes some essentially meaningless guesstamated percentages on the front. Turning over the p age and looking at the fine print tells a very different story that makes you want to hang a "DANGER: Go Back!" sign on it if you could.
This is a 30 year fixed rate mortgage. [that's good so far] Initial payment and APR are set for 5 years only [Er, WHAT?] After the first 5 years, rate and fully amortized payment are based on the fully index 30-year fixed rate [it doesn't specify if they mean today's rate or the rate in 5 years]. The initial payment rate and payment reference is a minimum payment option which is fixed for the first five years and will result in deferred interest. (!!)

That's just totally scary. It's one thing to do that with a student loan (I did that) but this means that the longer you pay the minimum, the more you will owe on a house that is probably too expensive for you anyway. You are basically building no equity in the house. You are essentially renting it while still taking on the risk and hassle of ownership with none of the payoff. This would only work if the value of the house increases in the next 5 years and it ain't gonna. After 5 years, your payments will be more than what you would have paid if you'd been able to get a fixed rate loan. The lenders win and you lose big time.

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