My daughter's balloon loan nightmare
Letters to the Editor
By Inman News, Tuesday, November 4, 2008.Re: 'Nearly 10 million homes upside down' (Oct. 31)
Dear Editor:
I read your article with great interest. My husband and I own our home outright and hope that our home will be a worthwhile portion of our final estate as we will likely be here until our dying day.
We sold our previous home to our daughter and son-in-law for a significant savings two years ago. The mortgage broker my daughter and son-in-law used understood quite well that the home was a bargain and that we did not want our kids to assume a subprime loan. I made it clear to him that we could easily sell the home for an additional $125,000 and that I would rather not sell them the home if it meant they would have to assume a lousy mortgage.
The paperwork we signed (closing terms) stated the loan was a 30-year loan at 7.475 percent interest. A bit high, but they didn't have a long career history so I understood that rate might be appropriate. I even called the broker the day before the kids signed because I was concerned about some of the things the kids told me, and was assured it was a good "fully amortized" loan.
The paperwork the kids signed was a whole other story: The loan is amortized over a period of 40 years but is due in 30 years, and has a rate of 7.475 percent that's locked in for the first two years only. If any part of the loan is prepaid during that two-year period they face a penalty of nearly $8,000. After two years, the interest rate adjusts, and then it adjusts six months later and then again after another six months. In early 2010 their monthly payment will be $920 more than it is now. So, after 30 years of astronomical payments they will owe a balloon of more than $230,000 on a $300,000 home. The broker told them, "Come back in two years and we'll get you a better loan."
Well, two years later and the home appraises at $260,000 (who'd have thought?), so to refinance they need to come up with another $60,000 and likely try for an FHA loan.
They were young, but a very responsible working family. The mortgage broker obviously made a significant amount of money on the loan, and the loan servicer (the initial lender went bankrupt) isn't interested in working with them.
What bothers me is that so many people are saying these people shouldn't have gotten themselves in over their heads, but my feeling is that mortgage brokers and bankers have to share the blame. If they felt the loan was risky, I believe they had an obligation to say so, and I particularly believe in this case I was misled.
The types of loan modifications that I am hearing about only delay the inevitable. Those who made a fortune off of the poor souls who are now suffering are getting off scot-free.
Irene Vejar
Homeowner
Lompoc, Calif.
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Submitted by Gregory Schreiber on November 4, 2008 - 2:38pm.
What bothers me is that you don't seem to have done your due diligence. How did you choose the mortgage broker? Did you take the time to shop around? Did you ask for alternative loans? For better or for worse, you need to accept responsibility for your own actions.
Submitted by Kevin Tinsley Tacoma's #1 Mortgage Expert on November 4, 2008 - 2:57pm.
Irene,
I'm sorry to hear about your daughter & son-n-law's situation. This is a perfect example why everyone should get a second opinion on the mortgage product they select. Relying on one mortgage professionals recommendations or the "Builder's Lender" or the "Real Estate Agent's Favorite Lender" limits your ability verify you are getting the best loan product.
Also take the time at loan closing to thoroughly review the loan papers before the loan closes. That way you know exactly the type of loan you are getting, how it works, and any unusual features. If something seems out of place or has changed since you first applied for the loan, ask to have it corrected before you close.
Best Wishes,
Tacoma's #1 Mortgage Expert
All Tech Mortgage.com
7403 Lakewood Dr W, STE 2
Lakewood, WA 98499
http://www.alltechmortgage.com
Submitted by Jack W. Dopp on November 4, 2008 - 5:25pm.
Jack W. Dopp An unorthodox answer from an 82 year old who isn't smart enough to be a licensed agent [but who has bought a couple hundred properties-and is now buying REO's for 25% of current market value] is to consider the loan modification. An expert can use the problems with Regulation Z to establish the loan as illegal-80% of the cases I'm told [see the Loan Safe website]. They are FHA approved. The most interesting way to modify is to reduce the loan to a 4 1/2% fixed rate-30 years and leave the original balance in place. The payments will probably be reduced to less than rent in your area. If you desire to sell, I can show you how to use a simple Land Trust to take title to the property-sell it , and retain control over your loan. Incidently, right now, you can put the property in that kind of Trust and sell it without triggering the due-on-sale clause. The Garn bill of '83 makes it legal. I'm in Beaumont, Ca.
Submitted by Timothy Countryman on November 5, 2008 - 7:06am.
Unfortunately, with the real estate boom, may people came into the field because of the potential for easy money. New, inexperienced "professionals" often outnumbered the veterans who had a better understanding of the business and its ethics as a result. This diluted the professionalism consumers as a group experienced in many of the associated real estate disciplines.
But that doesn't address the specific issue. Let the water pass under the bridge. Owning your own home outright may enable you to mortgage YOUR residence. You can then lend this money to your daughter and son-in-law, until their credit issues are straightened out, if they are truly responsible as you suggest. They can then buy out their current mortgage. Even if your equity will not cover the entire amount, it may be enough to get them past the value decline in their home.
Also I assume that you addressed possible tax/gift issues of selling the home at a $125,00 savings.
Tim. Countryman, GRI, CRS, CRB
Licensed Real Estate Broker
Countryman Real Estate Associates, llc
Submitted by Jorge Ponce on November 5, 2008 - 10:02am.
One of the things that I do and am very proud of is that I attend all of my closing/doc signings. At the doc signing I very clearly explain and reveiw the note with my clients. I can not tell you how apprecaitive my cleints are because this. I also conduct a post closing meeting to review the documents again. After 13 years in the business I do not know of anyone of my coutner parts that do this.
FHA has a new program out. The FHA HOPE. FHA will allow for them to refinance at 90% of there current value. Maybe this may be able to help them out.
I wish you and your family the very best.
Jorge Ponce
GEM Mortgage
(562) 712-4758
Submitted by Michael Espiritu on November 7, 2008 - 9:41am.
It is amazing how many people did not read nor understand their loan documents. I attend all closings with my buyers (I am a real estate broker) and have definitely noticed a more thorough explanation to clients as to what they are signing. I think it has to do with the large emblem of the FBI on the docs stating the penalties for loan/ real estate fraud.
We have had many clients who felt pressured to sign documents, hurried by a notary etc. I had a signing where the interest rate was incorrect and the lender had added a pre-payment penalty.
I told thim to fix and we would be back in one hour. If it was not fixed the deal would be cancelled. They fixed but if I did not read and understand the documents presented I would have been put in a very poor financial position and I am in the business. Imagine a first-time home buyer w/ no experience who believes incorrectly that the lender has their best interests at heart.
Michael Espiritu
Broker
Copeland Wealth Management/ CWM Real Estate