The recent article on BusinessWeek.com, "How Toxic Is Your Mortgage?", about the negative side to Option ARMs, presents a one-sided view that risks damaging the reputation of legitimate, caring loan officers who have endorsed Option ARMs as a viable mortgage strategy.
One thing we preach continuously here at Mortgage Coach is that our most important role as mortgage professionals is to help homeowners make informed decisions. Structured responsibly for well-informed and suitable homeowners, the Option ARM offers advantages over alternative products. But structured poorly with a misinformed and unsuitable borrower, you have a potential recipe for financial disaster.
We repeatedly caution LOs that one of the most attractive features of the Option ARM is your client’s cash flow flexibility—NOT your ability to earn a bigger commission or the realtor’s opportunity to sell a more expensive home. It’s important to always keep the customer’s goals as your priority. But with flexibility comes responsibility.
It is your responsibility to teach your client about the responsibility that comes with Option ARMs, and it is our responsibility (among others) to help you understand the options you can offer. It is especially important to help the homeowner understand the recasting feature of an Option ARM and to make a best effort to forecast the possible recasting point. That’s why we wrote an entire White Paper Around Explaining Neg Am Loans and how to properly use them. That's also why our Total Cost Analysis and Equity Repositioning reports give you the ability to compare different options to properly explain those options and the recasting feature of an Option ARM to your client.
Millions of people are going to see this article—people who do not understand their options and do not have a trusted advisor who can explain the facts to them and answer their questions—and so they will likely take the article as gospel.
I suggest you do the following:
- First, I strongly encourage you to read Business Week’s article and our Neg Am report to educate yourself on the facts about Neg Am loans.
- Second, be sure that your clients fully understand their options and the ramifications of negative option loans, especially the recasting feature.
- Third, I think it is important that mortgage professionals do their best to make sure that their client selects the right mortgage. If a homeowner can’t afford the fully indexed payment and isn’t going to actually increase their savings to offset the lower monthly payment, then they shouldn’t be using an Option ARM.
- Finally, be sure to keep in regular contact with your clients with a monthly RateWatch Report and an annual equity review with the Equity Repositioning Analysis to help them monitor the effectiveness of their existing mortgage, overall debt structure, understand the ongoing changes in the marketplace, and, when the time comes, identify the right opportunity to improve their debt structure and/or purchase a new home.
Like in any other field, there are unscrupulous loan officers who give the good ones a bad name. It’s your job to communicate effectively and with integrity with your clients to generate trusted relationships so that they don’t fall into traps. Remember, if your clients don’t win in the long term, either do you.
If you have already dealt with the challenges of combatting this article, please let our readers know how you handled them so they can learn from your experiences.
Link to the Business Week article "How Toxic Is Your Mortgage?" here:
http://news.yahoo.com/s/bw/20060901/bs_bw/b4000001
I read the B.W. article and was shocked at the bias! Although, considering how biased the media is in general (housing bubble?), I don't know why I was surprised! Thank you for this posting, I will be sharing excerpts with my business partners and clients, as I remind them that my focus is their best interests.
However, we must remember that the borrower, too, bears some responsibility for the choices he/she makes. All too often people hear what they want to hear and then claim, "no one told me" when the payment changes. What the article failed to mention is that the borrower signs documents that outline and state the terms of the loan. Any borrower who believes a loan officer who tells them ANYTHING different from the documents their signing, is abdicating responsibility for their own financial life.
I'm so proud to be a part of the Mortgage Coach "family", because by investing in this valuable tool, we are all committing to integrity and responsibility in our lending practice.
KEEP UP THE AWESOME WORK!
Posted by: Kim Willoughby | September 07, 2006 at 04:53 PM
Dave... great post about a topic that needs to be dealt with on many fronts.
Kim's right on that in our society the media, in general, seems to feel that the average citizen needs protection from themeselves... individuals have no responsibility if they are a victim. The media needs a bad guy in order to sell. Emotion sells. Blame sells.
I was disappointed but not surprised by the sensationalism of this article's first 1/3. It's almost as if an editor wrote the first part and an analyst wrote the second. The back end analysis of how the industry profits is pretty right on.
I do agree with the article's pointing some of the blame at the short term thinking of the lending industry. Many of my peers I've worked with have been richly rewarded to the tune of 3 points on loans where they sold payment, not responsible management. I've worked for 2 of the big 7 lenders and they have no policy in place for educating clients at the retail level, let alone the wholesale arena.
Mortgage Planning as a Practice is a shining star in an industry that will go through another round of "trust re-engineering." For those with a clean conscience and a true MP mindset, this is a time of great opportunity to earn business from what will be a large pool of very disillusioned borrowers.
Jim McMahon has educated his clients for a long time that a mortgage is a financial instrument. Now is the time when the consumer needs qualified, educated, and principled, and preferably Certified, Mortgage Planners.
Posted by: Matthew Bowe | September 08, 2006 at 02:03 PM
One of the major consequences of a lack of self-regulation as an industry is we open the door to justifying the actions of legislators and lawyers. Looks like the legislators made the first move:
http://www.inman.com/hstory.aspx?ID=56972
Posted by: Matthew Bowe | September 22, 2006 at 09:03 AM
Are you guys kidding your selves or what? "If a homeowner can’t afford the fully indexed payment and isn’t going to actually increase their savings to offset the lower monthly payment, then they shouldn’t be using an Option ARM." I work at a national top ten subprime lender that buys the crap you guys are selling. These people call me all day and NONE of them have saved the monthly savings and invested it for huge profits and benefit. The best way to get to a "freedom point" is to stay away from stupid financial scams like this and act your WAGE. Don't get people into houses they can't afford and investors into houses they can't carry.
You tell people the payment is fixed and gloss over the fact the rate adjusts IMMEDIATELY and off you go to cash your checks. Perhaps you should go back to selling used cars where you belong.
Shawn in KC.
Posted by: Shawn Buxton | November 10, 2006 at 08:45 AM
Where can one get an online copy of the business week article about the "Toxic Mortgage". It looks as thought the link is now broken in this blog.
Posted by: Charlie | December 01, 2006 at 03:51 PM