OpinionIndustry News

Sales pitch all smoke and mirrors

Guest perspective: Negatively amortized loans add up to big profits for banks

Don't miss the real estate event of the summer
Join 4,000 real estate pros at Connect SF, Aug 7‑11, 2017

Editor's note: Steven Krystofiak offers an insider's take on what's been unfolding in the subprime mortgage industry. Read Krystofiak's previous articles, "What is a subprime loan? It depends on whom you ask"; "High-risk loans enable buyers to obtain, not afford homes"; and "Why home-ownership shortcuts will lead to longer recovery.") Many mortgage companies have consumers concentrate on the glitz and glamour of low monthly payments based on "option interest rates" of 1 percent or 1.95 percent, much like a magician trying to pull off a disappearing trick on stage. These rates are used to calculate monthly payment, but while the consumer makes these low payments he or she is being charged something else -- a higher rate. The magician comes out and reveals a trick: In reality, and oftentimes completely unknown to the consumer, the monthly payment being charged is derived from an interest rate usually between 7.5-9 percent. This rate can be 2-3 percent higher than what that same consume...