Negative Amortization....why
I am an on-site agent. I had a lender tell a buyer that he would be getting a 2.75% NOO 5/1 interest only rate (with 20% down). Gave them a GFE and everything. Then at closing, the payment on the closing statement was double what they were told it would be and they ask why, and the attorney tells the buyer that this in fact is some sort of negative amortization loan and the homeowners flipped out. They asked the lender what the deal was, who was there btw, and he said there is nothing wrong with this type of program, but could not explain why their payment would be higher than originally explained. Needless to say they walked away. Why would a lender (this guy actually owns the mortgage company) do this? Does he make more on the back end or something? My builder (the seller) is furious .
Sunztu18
Backend points shouldn't double the payment. The buyer and lender/broker were obviously in poor communication. Unfortnate too, as negative amortization loans are not as dangerous as the media makes them out to be especially if you are buying properties that will appreciate quickly such as fixer uppers that will become fantastic for cashflow once rented.
These are new construction homes in a brand new neighborhood though, not fixer uppers that will appreciate quickly. I think the lender was being shady.
Suntzu18
A negative amortization loan would not be the reason the payment doubled. it has to be something else. The way a neg. amortization loan works it that some ARMs have payment caps that limit the amount the monthly payment can increase at each interest rate adjustment . If the amount of interest owed exceeds the capped payment amount, and the borrower chooses to pay only the minimum payment due, negative amortization can occur. But the borrower can elect to pay more based on the rate change which would prevent neg. ammortization.
Neg.ammoortization is designed to keep you payments low if rates skyrocket. Not make your payment higher.
The only thing I can think of is if there was some kind of estimate future payment calculated on the closing docs that reflected an example of where the payment could be at the maximium rate cap.
I also think something was wrong somewhere in either the communication or the closing doc that showed the pymnt under certain circumstance.
Anybody knows that a 2.75 int only 5/1 rate would have to be a 'starter' rate. My guess is that it was a cofi arm or something like that with 5 years of potential neg. amortization and then it looses the negative choice.
I have a cofi loan that I took in '96 and I love it, love it. It now varies each month by a tad, has been under 5% for some time now. Even the negative that I had built was NO problem to pay down!!
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On 2005-01-04 16:00, ceinvests wrote:
Anybody knows that a 2.75 int only 5/1 rate would have to be a 'starter' rate.
Not everyone knows this. And a lot of lenders / brokers advertise the low payments like they are real payment.
Not knowing all of the facts my guess is that the broker did not educate his customer to what kind of loan they were getting.
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On 2005-01-02 19:31, suntzu18 wrote:
They asked the lender what the deal was, who was there btw, and he said there is nothing wrong with this type of program, but could not explain why their payment would be higher than originally explained.
If he is the owner of the firm, is selling this product and can not explain it then he needs to be reported to who ever regulates brokers in your state. Your in Ga right?
http://www.ganet.org/dbf/dbf.html
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Needless to say they walked away. Why would a lender (this guy actually owns the mortgage company) do this? Does he make more on the back end or something?
No, but he can do more loans by selling payment.
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My builder (the seller) is furious .
Don't let your future buyers buy from you if they are using him and spread the word to RE agents that you work with.
Lacash,
You are right, that was an assumption on my part that people would know that you don't get something for nothing; 2.75 is too low unless a teaser. *I agree with you that it appears that he did not explain his product, but I see too many people not listen to details, so I am soured.
I overlooked the statement that he could not explain. I do not understand why nobody is reviewing for the specifics of this loan so that the particulars are known. It might be a good loan, just the facts are not clear. Those specifics would be right there in the closing docs.
I see too much bad press on negative amortization when it is no less a strategy than int only, arms, etc.
Any loan used the right way can be a great cash managment tool, or it can be the wrong tool. Like using a 30 year fixed rate loan on a very short term holding.
The issue here was that the broker did not do the job that they should have done.
Used correctly NegAm loans have a place. But most of the bad press that they get IS Legit due to brokers like this guy who push the low payments on people without explaining what is really going on.
Now I will agree with you that people also hear what they want to hear and forget the rest.
When the housing market slows down NegAm loans will make me a lot of money.
First of all, it seems the guy you had present at the closing (who owns the mortgage company) is not a lender, but a broker, at best. Most of all he is not a good one, if not to say more - very dishonest.
, but in this case you will build a negative amortization on your loan principal, OR you can ellect to make a higher payment (which could be similar to the current rates for 5/1 programs or even higher), in this case you will pay more then the minimum, but prevent the negative amortization. Sometime the NA issues might start only after the first 5 eyars, but more often, especially for the low intro rates programs - they could start from day 1.
I was a mortgage broker back in 1995-1998, but left that field to buying seller-financed notes just due to such examplary situation as you have faced.
Actually, as bad as it is, there is nothing unusual in your case. And that is unfortunate by itself. Over the last few years it became a trend:
Over the last few years more and more "creative" mortgage products were pushed into the market. And there is nothing wrong with the products by itself, but only problem is who is using them and how.
The situation what you've got is a tipical "scam" that many brokers use in nowdays to get new "uneducated" customers: they advertise a very low interest rate, forgeting to mention some "fineprint" from the program guidelines or not even care to read it, which could refer to negative amortization issues = you can ellect making payments based on the 2.75% (represents the "minimum-allowed payment"
The way such "scam-artists" do it = they apply such approach only to new purchases (like you had it hear) and look at the earnest money deposit (to make sure the buyer will not leave the table). At the closing they surprise you with a hit.
It is one of the reasons why it became nearly impossible to deal against such people as you cannot always explain to a non-educated consumer why another mortgage broker has offered much "better" deal. But some people try to buy the "cheapest" deal, not always realizing that "free" is only a cheese in a mousecatcher.
Starting in July a new requirement came in for all of the people dealing with mortgages = they must get a license. From 1/1/05 it became mandatory (regulation now for them is similar to one for RE agents).
If you ever witness such dishonest people, you defenitely should report to the authority, to make sure they don't harm any more of your respected customers nor anyone else.
[addsig]