Tuesday, April 14, 2009

Financially Sophisicated

One has to be financially sophisticated to understand how one can have a mortgage payment that exceeds their monthly income. It is also necessary when understanding why ten-thousand in broker fees for a new loan is necessary. Financial sophistication can help us understand the logic of using a HELOC to pay a mortgage - and being advised to do so by your mortgage broker. It is should be a mandatory requirement for those who use option arms.

Today the Wall Street Journal brings us an article titled Older Borrowers, Out in the Cold that gives numerous examples of people hurt by the financially sophisticated among us. Let's take a look -

In 2006, Carol Couts, a 66-year-old widow in Yuba City, Calif., was living in her home, payment-free, when a mortgage broker persuaded her to refinance her no-cost mortgage for one that exceeded her monthly income by more than $400.


In 2007, she received numerous phone calls from a mortgage broker named Daniel Lewis. According to Mrs. Couts, he told her he was contacting seniors to warn them that banks were canceling reverse mortgages because they were unprofitable. She would have to refinance her home, he told her, or lose it. (This wasn't true; reverse mortgages generally aren't repayable until death.)


During the mortgage boom, brokers commonly cold-called older homeowners. "I was inundated," says Floy Mae Bryant, 84, a retired telephone operator in Visalia, Calif., who had owned her home since the early 1990s. Loan records show Mrs. Bryant refinanced six times in less than three years using multiple brokers.

Serial refinancing was common among older borrowers, legal-aid lawyers say. Brokers pitched loans with low teaser rates, explaining the homeowner could simply refinance when rates reset. Yet borrowers like Mrs. Bryant didn't understand that each refinancing added thousands of dollars in fees to their debt.

Mrs. Bryant's last refinancing was in September 2005, just a month after her previous one. A mortgage broker placed her in a Countrywide Financial Corp. "option ARM," an adjustable-rate mortgage with a monthly payment of $1,545, barely affordable on her $2,310 Social Security and pension income. To make her mortgage payments, she drew on a $39,000 home-equity line of credit that the same broker encouraged her to set up.

There was another example we left out involving a lender referred to by a church - with the Reverend being friends with the broker. Problems like this are very common. Unfortunately it is hard to sort out what was fraud and what was just carelessness. Also the fraud cases can be confusing and hard to convict.

The interesting part from the article is that fraud cases are usually prosecuted when the fraud is against the lender - not in cases where fraud is committed against the borrower.

Hopefully some of financially sophisticated products that evolved during the Great Housing Bubble will no longer be available in the future.

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