Nightmare Mortgages and Self-Destructive Behavior

This article started with another one of those desperate consumer fishing calls a while ago. Loan standards have tightened since then (In my considered opinion, over-tightened and the lenders and Wall Street will figure it out within a couple years). Stated Income is no longer available, and as much as I dislike stated income loans, there is a group of people for whom they are the right choice. Negative amortization (aka "Option ARM" "Pick a Pay" and many other friendly sounding names) is no longer available, and that's 99.999% a very good thing, but there was a tiny niche of people who had a legitimate use for them.

This particular phone call began with her saying said she had to have an Option ARM. I told her I had them available to me (then), but...

She interrupted me to say she had to have it Stated Income, or if necessary, no documentation. Yes, I told her, even those are still available (they were at the time), but...

She interrupted me again, wanting to know if they were no points and no prepayment penalty. I said that while I hadn't done a loan with a prepayment penalty in years, Option ARMS without prepayment penalties didn't exist. I'd looked, back then. Whereas there were no legal impediments I was aware of, it wasn't the way negative amortization lenders did business. She then said, "We've come to the end of the conversation," and hung up.

Obviously, she's been burned by someone. Just as obviously, someone else gave her a shopping checklist for a loan, or she made it up herself. She wants it all, she's not going to settle until she gets it, and she's not going to let some horrible awful salesperson lead her astray like last time. In fact, she's so determined on this point that she's not going to let anyone try to save her, either.

As regular readers have no doubt figured out by now, here's her history. She didn't tell me this, but It doesn't take much if you understand the way the market went during the relevant time period.

She either bought a property more expensive than she could really afford, or refinanced a property she already owned for cash out, and could not afford a real loan now. Not understanding that minimum payment is not the same thing as the cost of the money, and that you should Never Choose A Loan (or a House) Based Upon Payment, she signed upon the dotted line, not really understanding anything that was going on except that she wanted that house, or that cash.

Along she went, happy as a clam, until she got smacked upside the head with the real cost of money, aka the interest rate she was paying. Gravity never quhttp://www.searchlightcrusade.net/2020/03/loan_qualification_standards_l_3.htmlits, and compound interest working against you is even worse than that.

And here's where it gets really sad. Instead of figuring out her mistake, or cutting her losses, she is determined to repeat the mistake and make it worse. So determined that she's not going to let anyone stop the process before it gets even worse than it is today, however bad that is. She didn't mention anything about loan to value ratio, but I'll bet it was higher than the 80% that's the most any lender would have accepted at that time for stated income (if debt to income ratio wasn't outside of any acceptable range there would have been better loans to do in the first place). What's the definition of insanity again?

The loan she wants is not going to happen. But that won't stop people from telling her that they can do it, figuring once they get an application and psychological investment, not to mention hundreds of dollars of her cash, then they come up with something else at final loan signing, chances are that she'll sign it and they'll get paid. I went over this in The Doctrine of Delaying The Moment Of Truth. The loan they'll get her probably won't be as bad as what she wants, but it's unlikely to do her any good. She owes what she owes. If she could afford the loan, she wouldn't need stated income or negative amortization, and she probably wouldn't have needed them in the first place.

Furthermore, she's shopping her loan from a checklist of things somebody told her were good or bad, completely ignorant of the fact that she can't have them all. There's a reason I tell people they need to ask all the questions on this list from a prospective loan provider. It's not a simple matter of shopping your loan until you get everything on a shopping list. Some things do not go together at all, like negative amortization loans without a prepayment penalty. In all cases, there are tradeoffs between A and B, C and D. You decide which you want more, or which you don't want more, or, in the case of points and cost vs. rate, where on the spectrum of the tradeoff between rate and cost you want to be. Some providers may give you a better set of tradeoffs than others, but those tradeoffs still exist, and pretending they don't is a good way to end up with a putrid loan. Somebody will tell you about a loan that doesn't exist in order to get you to sign up with them.

Before you can ask the questions, however, you've got to let a professional have a reasonable chance at figuring out the best loan for your situation. In order to do that, you've got tell them enough information so they know what your situation is. After I propose a solution, then you can ask those questions and give me the third degree, and if you're smart, you're going to shop it around until you get a couple or three different opinions, and cross check the information each provides against the other. You might still get conned, especially if you don't make the effort of comparing and cross-checking answers. But as I went over in The Ultimate Consumer Horror Story, if you won't talk to sales persons, as in real conversations, I can pretty much guarantee you're coming away with your own private version of the Nightmare (mortgage) on Elm Street.

Caveat Emptor

Original article here