Mortgages from the Dark Side, the Rebellion has Started
The trouble in the mortgage lending industry was first revealed to me shortly after accepting my first job in finance. Upon graduating college with a finance degree I took the first finance job available. Since I had bills to pay and the job market was weak I took the first employment opportunity offered. The job was an assistant finance manager at a local finance company not far from my apartment. The company was engaged primarily in the origination and collection of personal loans and mortgages, mostly second mortgage or home equity loans. This finance company was a division of what is now the eight largest bank in the nation. Not the best job but far from the bottom.
Shortly after the training concluded, I learned that there were three activities you took part in at the finance company. You sold the consumer loans, you closed loans and you collected the loans or the payment on the loans. We ate lunch and used the facilities too, but other than that we sold loans, we closed on the loans and we collected the loans. The reason we spent so much time collecting loans was that the delinquency rate at finance companies is fairly high and it is necessary to stay on top of the customer in order to make sure the client makes timely payments.
Nothing overtly wrong with these lending activities. Except, there were at least two glaring immoral deeds that we committed. One was that we spent a third of our time on the phone selling loans. Let me shed some more light on what I did. I was on the phone selling loans to your neighbors constantly. These sales calls had a strong pitch and were performed with unrelenting tenacity by myself and peers in the industry. Sure it was a fairly high interest rate since this was a consumer finance company and we did not offer the most competitive interest rates and your neighbor really didn’t need to be bogged down with more debt, but I was selling money. I sold a consumer loan, either a personal loan or second mortgage to help your neighbor buy a new car, go on a family vacation or maybe even consolidate debt.
It isn’t necessarily cocky to tell you your neighbor didn’t stand a chance. I sold the low monthly payment, hell I couldn’t sell the outrageous interest rates, I sold the neighbor how he can use this money for the vacation his wife and kids deserved, I sold an escape, a low monthly payment escape that your neighbor was entitled to. He didn’t stand a chance; he couldn’t say no. He took the loan. I wasn’t going to let home say no. Sometimes that took 10-15 phone calls until they said yes.
Once I closed the loan, which is lending speak for having the customers execute and sign the appropriate loan documents and disclosures, and some timely monthly payments were made, I picked up the phone and sold your neighbor more money. I sold the benefits of refinancing and taking out more cash on top of the existing loan so he can finish the patio and buy the new grill and eat some tasty USDA prime rib eyes. He went for it. Hey, he didn’t stand a chance, I was good at it, and we were selling money.
Sales rule number one in most businesses is that the present customers and former customers are your best candidates for additional sales, in our case that would be additional loans or larger loans to the existing accounts.
After a few years or even one or two years, I may have refinanced this customer three times and elevated his debt load significantly. Eventually, this loan and the other debts your neighbor has are killing him. He can’t make all the monthly payments. His wife is now pissed given that she can’t use her credit card at the grocery store since the credit card limit has been reduced because they can no longer make their payments on time. And after numerous sleepless nights, the neighbor finally decides to go for a fresh start and files bankruptcy.
This is a situation I witnessed every year in consumer finance and mortgage origination’s, equity extraction with first mortgages and home equity loans as well as consumers loans and excessive credit card use was letting consumers live well beyond their means. These individuals and families were making $75,000.00 ( as an example ) and when I would pull their credit report one year later they had an additional $15,000.00 in debt. That doesn’t sound crazy at first except you have to consider that these are mature workers who are not likely to be looking at large pay raises in the foreseeable future. So, Mr. & Mrs. Jones are making $75,000.00 and I add their new debt and it appears they are spending $90,000.00.
The easiest solution for them was to incur more debt with a home equity loan or mortgage refinance and keep the party going, never paying attention to the fact that they spend more than they make almost every single month of the year. And this was common.
Eventually, the music stops and these people can no longer borrow more money or consolidate what they have to a lower payment and it times to pay the piper. Their house of cards built on easy money comes to end with bankruptcy, foreclosure and other unpleasant outcomes. Some customers run to file bankruptcy to eliminate these consumer debts or create a new manageable payment plan, but most of my customers agonize for months over the thought of bankruptcy. It tears their family apart and it weighs them down terribly.
The company I work for has a position on bankruptcy that is similar to most mortgage lenders, banks and credit card companies which is that bankruptcy is evil and should be restricted. At the Dark Side Lending Company, we even attended the bankruptcy hearings. This is a very uncommon practice. Chase Bank, Chrysler Financial, Countrywide, none of these creditors would normally attend a personal bankruptcy hearing. We do, basically to shame the customer into making payments or reaffirming the debt with us.
There I am, the man who may be the most responsible for driving this family into bankruptcy because of my sales skills and the incredible marketing support of Dark Side Lending. Boy was I ashamed. I see this family in bankruptcy court and my heart falls into stomach. I can recall all the sales calls I made to them over the past couple of years. Not a few sales calls, but sales calls every other month, every year. Telling them how great it would be to take another loan.
I wake the next morning and do this all over again. Over sell the loans, close on the new loans and collect the payments one way or another. It got to the point where I took a shower before I went to work and I took a shower when I get home to clean the filth of the industry off of me. A practice I repeated at various lending institutions I worked at for the next twenty years.
These families, your neighbors, which are struggling with payments for a whole host of reasons one of which is because I sold home loans they could not afford. Sure they had responsibility. But, I can not emphasize enough, I am good at my job. I can sell loans. You don’t stand a chance, you try to say no but I’ll get you eventually. And it wasn’t just me. Lenders whether they are mortgage lenders, banks or credit card companies across the nation market and advertise in the mail, on the phone, on the Internet on prime time TV and late night TV. You can’t escape the marketing muscle of the Dark Side of Lending.
One day when I was watching the Bears play with my dad and we had a discussion on consumer debts and bankruptcy. At this time, one of the bankruptcy reforms bills was working it way through congress. During this discourse I told him that bankruptcy statues exist because of me. After he laughed for quite some time, he asked for a little elucidation on that statement. I explained that consumers file bankruptcy because of sales men, or finance managers like me who shove these loans down the consumers’ throat and bankruptcy is a necessary evil to even the field against the marketing muscle of the Dark Side of Lending. I assure you the force on the Dark Side is strong.
Why do we have bankruptcy reform to make it harder for the consumer to escape the likes of me, it’s simple. The banks fill the congressional coffers with cash. Oh yeah, the other side of the story is that somehow congress thought bankruptcy reform was good for the nation and the American people. Wow. How is that possible?
Ever since that time, if a friend or a friend of friend asks me about filing bankruptcy and the impact on their credit, etc…my reply is always the same, file and file often. Stick it to the lenders. Run the credit card up and file bankruptcy. It’s your duty as a citizen to make up for all the misdeeds performed by consumer finance companies, mortgage lenders and credit card companies by wiping out the debt and handing a loss to the lenders and bankers.
This was a start of long career working with the Dark Side of Lending. This was just the beginning.
Getting a Mortgage for Home Improvements
If you are sitting in your home pondering a major expansion in the kitchen, finishing the basement, or completing key repairs of the home, a new mortgage is one potential source of funding for such a project. Of course, there are many sources of funding for these undertakings. Cash on hand, credit cards, or even personal loans can be used to help pay for work on your property.
The key advantage of mortgage funds is that the rate you pay on a mortgage is almost always the lowest rate for consumer borrowing. In addition, the interest paid on mortgage debt is generally tax deductible (seek the advice of your financial planner or tax advisor). Furthermore, if a borrower is to take a mortgage to extract equity or cash out of the property, one of the best uses for this cash is improvements that help increase or secure the value of that property.
The three main choices for getting cash out of your property for home improvements are: a cash out refinance, a second mortgage ( including a home equity loan and a home equity line of credit ) and specialty mortgages such as the FHA sponsored 203K loan and FNMA and FHLMC home loans that are periodically introduced to assist with home improvement financing. Since the 203K loans are a seldom used product and specialty loans come in and out of favor, these home loan types will not be covered.
Before discussing the various home loan options it is important how a mortgage lender determines the equity in your home. The equity in your home is the difference between the value or price of the house and the amount of mortgage loans you owe against it. A house that is valued at $200,000.00 with an existing first mortgage balance of $145,000.00 has $55,000.00 in available equity. Though this may seem like a fair amount of equity, a mortgage lender will provide a new home loan for only a percentage of the homes total value not all of the value. If a homeowner in this scenario were to obtain a cash out refinance for 85% loan to value, the amount of money obtained would be approximately $25,000.00. This is calculated by taking 85% of the home’s value or $170,000.00 and then subtracting the existing first mortgage balance to arrive at a lendable equity figure of $25,000.00.
Mortgage refinances are one of the most common methods for obtaining cash for home improvements. Refinance transactions are often 50% or more of all the loans originated across the nation every week with a great deal of variation depending on the level of mortgage rates. A measurable percentage of these refinance transactions are to extract cash from the property. This cash is used for an assortment of purposes; most mortgage lenders will tell you almost legal purpose is acceptable for a cash out refinance.
Fannie Mae and Freddie Mac do not establish rules on the home improvements a borrower may or may not finance with a new mortgage loan. Therefore an existing homeowner can obtain a cash out refinance to finish the basement, do repairs or add a new room to the structure. There are no limitations on the minimum amount or maximum amount of financing that needs to be spent on repairs. If a borrower obtains a cash out refinance to pay for home improvements the main consideration of the mortgage lender is the condition the property is in as well as what the funds will be used for.
Standard conventional home loans are made based on the existing condition of the property. This approach results in a standard new home loan qualifying based on the as is value of the property not the as-completed value. Deferred maintenance is the term mortgage lenders use to describe a property that is in disrepair. Minor deferred maintenance does not often raise any red flags. Significant deferred maintenance will usually have to be addressed by the appraiser when they inspect your property. The appraiser will generally attribute a dollar value to the amount of deferred maintenance.
If a property is presently in disrepair the mortgage lender will not a grant a conventional loan. If the property is going to have a significant structural change the mortgage lender may also be concerned about approving the home loan. Questions may arise as to who is performing the work as well as how and when it will be completed. Oddly, even though the mortgage lender based the decision on the home loan on the existing property condition and value if a new mortgage loan is going to impact the lenders collateral significantly, they will want to make sure precautions are taken such as a licensed contractor is performing the work. The improvements should be performed by contractors who are licensed, registered, or certified or have the highest level of certification required.
Other than the limitations on the loan to value for a cash out refinance the structural changes that may be performed, a mortgage refinance is straight forward and the guidelines are the same as they are for a purchase regarding credit, income and debt ratios.
Home equity loans and second mortgages are also an option and are considered interchangeable terms. These loans are mortgages you get after you already have a mortgage loan on your property. There two distinct different types of home equity loans or second mortgages, the home equity line of credit and the home equity loan.
The home equity loan is generally a fixed rate loan that taken out for a predetermined amount and is disbursed to you at one time. The home equity line of credit is also a predetermined sum of money but instead of getting the money all at once you are given a checkbook to access the available balance of the loan. Most all home equity lines of credit are based on a variable or adjustable rate.
These loans will have similar qualifying standards as first mortgages. The borrower’s income, debt ratios, credit and the amount of the loan relative to the property value or loan to value will be evaluated. When measuring the loan to value for a home equity loan the mortgage lender will add the first mortgage amount plus the propose second mortgage amount and divide that figure by the home’s value to come with a ratio called the CLTV or combined loan to value. If a homeowner has a home valued at $200,000.00 with a first mortgage of $125,000 and requests a home equity loan of $30,000.00 the original loan to value is 63% and the combined loan to value will add the home equity loan and would be 78%.
One of the main disadvantages of home equity loan is the mortgage rate on these home loan products is higher than the mortgage rates found on first mortgages. A second mortgage home loan is considered to be a more risky loan for a mortgage lender or bank. The mortgage lender charges a higher mortgage rate over a home loan that is in first position.
Aside from acquiring the loan you may need, make sure you pay attention to the increased expenses of home remodeling. Get at least three quotes and stay within a budget. Taking cash out of your property for home improvements is generally one of the best uses of the equity, often the cost of home improvements do increase the value of your home on a dollar for dollar basis.
There is an ample supply of mortgage lenders that will offer home improvement loans available. It is up to the homeowner to decide which one is the most suitable for their needs and budget. The first step should be to find out as much as possible about potential mortgage refinancing, home equity loans and the mortgage lenders. Utilize the mortgage calculators to help determine debt ratios, loan to values and monthly mortgage payments. Closely consider important factors such as mortgage rates, and closing costs. Shop and compare home loans carefully before making a long term commitment.
How Mortgage Interest is Paid and Calculated
Home mortgage interest is any interest that is paid on a mortgage loan secured by a home. The mortgage loan can be for the purchase of a new home, a mortgage that has been refinanced or a second mortgage. On all of these home loans the repayment period will include monthly mortgage payments of principal and interest, unless the home loan has an interest only feature in which case the home loan will not include the repayment of principal. In the terms for the monthly mortgage payment on the home loans the mortgage interest that is paid with each total monthly mortgage payment is paid in arrears. This means that the principal and interest payment will pay for the 30 day period of mortgage interest before the payment due date. A home mortgage loan payment paid on the 1st of April is paying for the mortgage interest that accrued in March.
Every time someone closes on a home loan they will prepay the mortgage interest from the time the money is disbursed to the beginning of the next month. Then the first regular monthly mortgage payment is due on the following month. For example, you may have a March 15 closing on a home loan, and the mortgage loan agreement calls for the monthly payment to occur on the first of the month. At the closing you will be required to pay the mortgage interest for the remainder of the month of March at the loan closing, approximately half the month. However, your next payment is not due on April 1, but rather will be due May 1. The payment for April which is due on May 1 and all subsequent payments are made “in arrears” or for use of the money for the previous month.
When you engage in a mortgage refinance and see the payoff letter from your existing mortgage, you will notice it is higher than the principal balance. Since the payments are paying the interest in arrears, if you paid a June 1st payment and request to see a payoff for June, the payoff will have the interest due from June 1st to whatever day of that month you want the payoff good for. Each scheduled mortgage payment on a fully amortizing loan is divided between the interest due for the month and the principal amortization, which is the gradual reduction in the original mortgage loan balance.
It is easy to compute your unpaid principal mortgage loan balance after you make your first monthly mortgage payment. Let’s use a home loan of $200,000 with an interest rate of 6%. First, take your principal mortgage loan balance of $200,000 and multiply it times your 6% annual interest rate. The annual interest amount is $12,000. Divide the annual interest figure by 12 months to arrive at the monthly interest due. That number is $1000.
Since your fully amortizing payment on this home loan would be $1199.10, to figure the principal portion of that payment, you would subtract the monthly interest number ($1000) from the principal and interest payment ($1199.10). The result is $199.10, which is the principal portion of your monthly mortgage payment.
Now, subtract the $199.10 principal portion paid from the unpaid principal balance of $200,000. That number is $199800.90, which is the remaining unpaid principal balance. The next month’s monthly mortgage payment will have the same mortgage rate but the amount of interest paid on the loan will be slightly less because the principal balance of the loan is less. Therefore, the next monthly mortgage payment has a larger portion of the payment applied to principal and a smaller portion to interest. In the beginning period of the home loan, these numbers will seem inconsequential but as the numbers of monthly mortgage payments add up, the amount going to interest decreases as the mortgage loan balance decreases.
With each consecutive payment, your unpaid principal balance will drop by a slightly higher principal reduction amount over the previous month. This is because although the unpaid balance is computed using the same method every month, your principal portion of the monthly payment will increase while the interest portion will get smaller.
Note, these numbers are round numbers for purposes of simplicity of understanding. If you are paying off a mortgage loan, you must add daily interest to the unpaid mortgage loan balance until the day the mortgage lender receives the payoff amount. To compute daily interest for a mortgage loan payoff, take the principal balance times the interest rate and divide by 12 months, which will give you the monthly interest. Then divide the monthly interest by 30 days, which will equal the daily interest.
As an example you have $100,000 and you decide to pay off your mortgage on January 5th. You know you will owe $99,800 as of January 1. But you will also owe 5 days of mortgage interest. How much is that?
$99,800 x 6% = $5,988 ÷ by 12 months = $499 ÷ by 30 days = $16.63 x 5 days = $83.17 interest due for five days.
Figured precisely, you would send the lender $99,800.40 plus $83.17 interest for a total payment of $99,883.57.
Fair Lending Protection in Home Mortgages
When you apply for a mortgage loan to purchase a house, refinance, or for a second mortgage, there are two federal statues that protect you rights and curb abusive lending pertaining to discrimination. These two acts or statutes are the Equal Credit Opportunity Act and the Fair Housing Act. Many aspects of the rules and regulations of the two acts overlap. Congress intended to provide sufficient protection to homeowners and borrowers when cases of potential discriminatory practices arise.
The Fair Housing Act prohibits discrimination in housing based on race, national origin, religion, sex, familial status and handicap. Much of the act covers action in housing as it pertains to rentals and sales. The act also covers several aspects of discriminatory practices in mortgage lending. The main components covering prohibited lending practices based on race, color, national origin, sex, familial status, or handicap are:
Refusal to make a mortgage loan.
Refusal to provide information regarding available home loans.
Enforce different terms and lending conditions.
Discriminating regarding the appraisal of the property.
Refusal to purchase a home loan or set different terms for purchasing a home loan.
Advertise or make statements that indicate limitations or preferences based the protected classes.
Interfering with those who are exercising a fair housing right.
FHA prohibits discrimination in these specific cases but is also designed to cover almost all aspects of mortgage lending. Mortgage origination’s and mortgage lenders are covered under FHA as is appraising residential properties, the buying and selling of mortgages irregardless if the loan is to purchase, build, repair or make improvements to the residential property.
ECOA is primarily designed to cover credit transactions. ECOA bars discrimination in credit dealings based on race, religion, national origin, sex, marital status, age, income derived from public assistance, or a borrowers ability to exercise their rights under the Consumer Credit Protection Act.
If you apply for a bank mortgage and are turned down, remember that not all institutions have the same lending standards. Shop around for another mortgage lender or bank. If a lender does deny a mortgage loan or place an applicant in a high mortgage rate and high cost loan, it does not mean they have broken any federal laws. These companies are just predators exploiting the weakness of borrowers in need. But if the way you were treated suggests the possibility of unlawful discrimination, you may want to check with a local fair housing group, the state enforcement agency, the local branch of a federal enforcement agency or contact the Department of Housing and Urban Development at:
Office of Fair Housing & Equal Opportunity
Dept. of Housing and Urban Development
Washington, DC 20410-2000
1-800-424-8590