NAMB's retort to Business Week.
David Porter, of the Pacesetter Mortgage Blog, has published Harry Dinham's (president of the National Association of Mortgage Brokers) response to Business Week's article on Nightmare Mortgages.
One particular passage I found ridiculous was,
Harry Continues
Their are plenty of fine Brokers out there that know when a pay option ARM is right for their customers. But to ignore what the dirty underbelly of our industry is doing continues to reinforce my low opinion of NAMB.
One particular passage I found ridiculous was,
"The story focused on pay option arms. Although they have their place in the vast array of loan products available, such loans are not for neophytes, nor the uninformed. While the mortgage brokers inform their customers about the different loan products that meet their specific requirements, it is up to the customer to select the loan they want.What? Harry has his head in the sand. There's a significant segment of our industry that pushes nothing but pay option ARM's. They purposely confuse borrowers into thinking the starting payment will remain constant, and carries no consequences. These unscrupulous brokers glaze over the fact that even an interest only ARM will almost always have a lower interest rate than the option ARM's IO payment choice. They also do do their best to obscure the pre-pay penalty they are imposing so they can earn a few extra points in YSP.
Your explanation for the burgeoning popularity of pay option ARMs is to cast blame on mortgage brokers for steering consumers into loans that pay the highest commissions. Both accusations are false. Steering is illegal, and in fact, there is no clear advantage to the broker to sell these loans."
Harry Continues
"A better explanation is the simplest one: most people want the lowest possible payment, and they believe the value of their homes will increase."No, a better explanation is that brokers take advantage of this product's low, initial payment, and push it like car salesman with his four square worksheet. Always pushing payment, always diverting the customer's focus on the shell game happening in the other three squares.
Their are plenty of fine Brokers out there that know when a pay option ARM is right for their customers. But to ignore what the dirty underbelly of our industry is doing continues to reinforce my low opinion of NAMB.
4 Comments:
Todd,
I hear your concerns and gave some response back at my blog.
My advice is get involved and become a part of the solution. I have been involved with NAMB for 15 years. Ours is a very young industry and has a lot of work to do. We could always use intelligent and passionate people like you to grab the torch!
Keep up the good work!
Dave Porter
Todd, I agree that there is a significant segment of our industry that pushes nothing but pay option ARM's. Even worse, many LO's are so green that they don't understand (or care) how the program really works. I wrote about this problem a couple months ago. Although, I must also point out that NAMB is an advocate for this industry. If not for their postcard campaign in '02 then we might be suffering from HUD's proposed RESPA reform. Subsequently, the FTC completed a study and determined that consumers would have chosen the more expensive loan (thinking they were getting a better deal) that the bank offered, had the RESPA proposal gone through - this is ongoing of course. Anyway, you've got a great blog and I like your insight. Here is the article from June '06
1,2,3%.....Can You Say Negative Amortization?
How about a mortgage with an interest rate as low as one or two percent? Wow! The payment on an adjustable rate mortgage may sound great but as the old adage goes: if it sounds too good to be true, it probably is.
At the time this article was written, the Federal Government borrowed money at 4.64% APY for a one month term, so can an individual homeowner borrower money at a rate lower than our government? The simple answer is no. Can this still be a good loan? Yes, for a select few who understand how it works. The remainder of this article will cover the basic questions you should ask when considering the negatively amortizing loan commonly referred to as an Option ARM.
First, let’s define some important terms.
Payment Rate: The percentage rate used to calculate your minimum monthly payment. It is typically the artificially low rate of 1 to 3% (or any rate equal to or lower than the One Year T-Bill rate: currently 5.23%) that is being advertised by your lender. Remember that the government borrows money at what is called the “risk free” rate and everyone else pays a higher rate that reflects a “risk premium”.
Index: The particular statistical indicator tied to your loan. This value may rise or fall over time and this may in turn raise or lower the interest rate on your loan. Some examples of indexes for the Option ARM are the Monthly Treasury Average (MTA) or the Cost of Funds Index (COFI).
Index Value: This is the numeric value of your index today. You can check the value of the index in the Wall Street Journal or other similar publication at any time on your own.
Margin: This is a numeric value that does not change over time. It is important to note that your margin is negotiable. A big mistake that borrowers make in obtaining an Option ARM is in failing to negotiate the margin.
Fully Indexed Rate: Now we are finally getting to the real interest rate you will be paying on your loan. The index value plus the margin equals your fully indexed rate. This rate may be 7%, 8% or higher.
Amortization Period: The actual number of years it will take to pay a loan in full.
Negative Amortization: The increase in mortgage debt resulting from the difference between the fully indexed rate and the payment rate (i.e. loan= $300k, payment rate =1%, fully indexed rate = 7%, then at the end of one year NEG AM could = $300k * (7% - 1%) = $18k and your loan at the end of the year = $318k).
These are the basic terms that need to be understood to begin to estimate the risk and rewards of an Option ARM. There are also payment and rate adjustment caps that offer some protection to the borrower. The Option ARM is an extreme way of leveraging real estate and managing cash flow. Theoretically, the borrower is making a rate of return higher than the rate of negative amortization. If this is the case, then the Option ARM works well for that borrower. Another suitable fit for this loan type is a borrower that will experience a dramatic increase in his income in a few years and the monthly savings are more precious at this present date.
The sad reality is that some lenders market the Option ARM as if that low, low payment rate is the actual interest rate and applicants flock to this type of financing without a true understanding of negative amortization. Even worse is the lack of understanding by many participants in the mortgage industry. Inherent in the Option ARM is the pre-determined limit to the amount of negative amortization permitted. That limit may be anywhere from 10% to 25% of the original loan balance. Regardless of any payment or rate caps, when the negative amortization increases the mortgage balance to that pre-determined threshold then all bets are off. The borrower can no longer pay that low, low payment rate. The borrower will also no longer have the option of paying an interest-only payment. The borrower will then be faced with having to pay a fully amortizing payment at the fully indexed rate. In a worse case scenario, this could result in an almost tripling of the minimum payment required before the end of the second year.
Obviously you haven't spent much time studying what NAMB is doing to improve the image of the industry, specifically the broker business. It's simpletonian to assume that the entire efforts of an association can be determined from one soundbite but I suggest you should dig a little deeper before reinforcing the negative.
Agree that Pay Option Arms have been pushed onto consumers by mortgage originators but strongly disagree that this activity is solely being undertaken by just the mortgage broker community.
Since mortgage brokers produce 70% of the loans in the U.S. reasonable assumptions would support that brokers originate the majority of option ARM's as well.
However the very problem brokers are facing are the obvious bias the media and some well intentioned bloggers are exhibiting to perpetuate that they are solely to blame. They are not. Option ARM's are sold by the Wells Fargo's and the Wamu's of the world as well.
Let's quit isolating brokers for the industry's ills and start developing solutions all originators can employ to raise the standards of our profession. Eh??
..."a better explanation is that brokers take advantage of this product's low, initial payment, and push it like car salesman with his four square worksheet."
Todd. That is some beautiful poetry right there. I used the same analogy a few days ago basically telling the consumer that "If they seem like a used car salesman, perhaps it is time to find another brokerage."
I am suprised NAMB would be standing up for this as opposed to condemning it, but none of us are in Harry Dinham's mind so who knows what the rationale is.
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