Sunday Morning: A Teaser Rate, An Option ARM, A Disappointed Borrower, A Lawsuit

Good Morning. Readers here often criticize borrowers who don't understand their mortgages, but have a little sympathy: these loans are designed to confuse the borrower, and often succeed. That's the point of Kathy Kristof's takeout today on a couple who took out an Option ARM and had no idea what they were getting into.

The "teaser"rate was 1.75%, and payments wouldn't adjust for five years; they had no idea the actual rate on the loan shot up to 8% after a month, and there was a pre-payment penalty of $18,000 if they refinanced.

"I am embarassed by this," said Jamie Horton, the borrower. "We are educated and successful people. I can't believe we were taken in like this."

The lender, Chevy Chase Bank of Maryland, says terms of the loan were clearly spelled out. The Hortons are suing. Says their lawyer, "I challenge anyone to pick up a set of these loan documents and tell me what is going on."

Comments? Insights? Your thoughts are always welcome.
Photo Credit: Reuters

Comments

[Mike S]

This couple is a victim of their own stupidity and at least they did not compound their error by lying on their application like so many others did.

To portray or insinuate the broker had a 'moral' obligation to be their friend in this financial transaction points the responsibility arrow at the wrong party. This couple sought out a broker and willingly signed a personal promise on a matter they admit they took lightly--did not fully-understand--until the reality of it in execution took hold.

The last time I checked, America is still about personal responsibility: good decisions are rewarded, bad decisions suffer consequences. Unless the contract was truly fraudulent in its representation, the fact it was simply too complicated for them to understand and they were too lazy to seek an alternative or get their own counsel to explain it is nobody's fault but their own.

How about a story on what it is going to cost responsible people like myself to pay for those who were irresponsible in their home loans?

[k374]

Absolutely agree with Mike S, a MAJOR decision like a home purchase cannot be made like going into a store and buying groceries. These people did not want to take the trouble of understanding their loan documents thoroughly. If they didn't understand any facet of the transaction they should've obtained independant clarification.

[Nate]

It's really sad when "educated" adults don't have enough common sense to read a document before signing it. All the interest rates in my loan documents were spelled out along with prepayment penalties etc. If you can't handle a mortgage you should be allowed to vote or drive either. The whole option arm saga is telling, it demonstrates the lack of responsibility people take for their own actions and lack of common sense.

[Mike S.]

I just reread the original blog opening. "Have sympathy for this couple???"

What about some sympathy for the HONEST and DILIGENT???

Millions of HONEST, DILIGENT Americans cannot afford homes because of dishonest and greedy buyers who inflated home prices far beyond their actual value.

We have to pay for both the higher home prices and the taxes for the administrative burden of these frivolous lawsuits. What is the point of their lawsuit: they were too stupid to get competent counsel and now should not be held responsible for their stupidity? And I should have to pay taxes for a court to hear that argument? Mr. Viles, your thoughtless and misplaced sympathies really need to be rethought.

[Pete Viles]

Mike S. -- thanks for the note. I take your point. Though, if my sympathies for the couple are thoughtless, which means I never really thought about them in the first place, I can't really RE-think them, now can I? (Sorry I couldn't resist).
Seriously, I'd be curious to see the one-page summary of the loan that this couple saw, or at least had a chance to see. Presumably they tried to understand at least that much of the paperwork put in front of them. Was the one-page summary an honest and easily understood summary of the loan? Apparently that is for a judge and/or jury to decide at this point.
But again, I take your point: borrower beware, be informed, and be responsible. How's that?
Pete

[www.BetterVillage.com]

Kristof's article quotes a fellow from Mortgage Grader: ""The broker's incentive is not aligned to the interest of the consumer," he said. "It is truly an adversarial relationship." Peter, this echoes your entry that: "Mortgage Brokers are not your friend." As you pointed out previously, brokers in CA are supposed to have a fiduciary duty to their clients, by law. Lenders do *not*. Upfront Mortgage Brokers not only do but put it in writing.

[sunsetbeachguy]

If you don't understand a legal document and don't have your own counsel to explain it, DON'T SIGN IT!

There is plenty of blame to go around and the fecal matter and fan will ensure it gets on everyone.

[Mike S]

Nicely put with flair Peter.

Guess their claim to be educated now includes home finance; the $85k as "tuition fee" to remind them not to WILLFULLY sign away on papers they cannot comprehend.

Their email inbox must be overflowing with Nigerian419 emails offering further education opportunities. I guess they won't feel responsible for these 'tuition fees' either in pursue of their next get rich quick scheme.

Realize I sound like a broken record, but seriously, how sympathetic should we be and how much cost to you think responsible people should bear for this couple's outright irresponsibility?

Let's see some articles on how the irresponsible and outright dishonest greed of these people are ruining the opportunity for the responsible and honest.

Or articles that explain to my kids why their parents must work extra and pay more taxes to support these irresponsible persons and those who went even further and signed loan documents knowing the documents lied about their income.

Mike S.

[Carlo]

I feel no sympathy for these suckers, er I should have said educated suckers. Does that make them smart lollipops?

Prospective homebuyers, this is your mantra: TRUST NOBODY! Mortgage lenders are there to take all that they can from you. Real estate agents will push you to a home that is clearly out of your price range. In fact, don't even trust yourself.

Mike S - I totally hear what you are saying. It is really sad that hard working drones like myself cannot afford to buy a home in Los Angeles. And I am not expecting to live in the nicest part of the county, but let's be reasonable with these home prices!

[Steve L]

How about presuming innocence before comdemning.......... Lot's of understandable frustration with the housing market out there I know. But............ I would want to see the facts before jumping to any conclusion. If the facts state the couple would have understood the loan terms after having done due diligence then they need to live with their choice (poor judgement). However, if there was deception on the part of the loan officer this couple should not be held soley responsible IMO.

[Mike]

Rule No. 1 of everything in life: If it sounds too good to be true, IT IS! Come on, if there was actually such a way to snag a less than 2% interest rate and not get burned, wouldn't everyone be doing it?!

[Numbers Guy]

There is a form with their mortgage closing documents that is called a TIL (truth in lending). This spells out in "plain english" the details of their loan. These people chose not to understand their loan. They just wanted into their house at a very low rate. Grow up and take responsibility for your actions!

[Jack]

You guys are being a little harsh without knowing all the details (which will hopefully come out in court)

If they got themselves into this pickle purely with wishful thinking then I agree with the angry comments about about how they got what they deserve. They are at least minimally culpable for not doing their own due diligence, obviously.

If the broker (did they use a broker?) purposefully deceived them, he violated his fiduciary duty and should get nailed. Just because you CAN screw people over doesn't mean you SHOULD screw people over.

[kb]

This story is further evidence that a 30 year fixed rate mortgage is perhaps the best way to protect yourself from hidden fees, dishonesty or outright fraud. The less complicated your loan, the less room lenders have to rip you off. Stay far, far away from ARM's, interest only, piggybacks, etc.

A 30 year fixed is so simple and straightforward (here is your rate for 30 years, no pre-payment penalty, no adjustment, etc) that you can sleep easy and know that you've protected yourself from unexpected fees.

Every time I speak to a mortgage broker or lender they begin buy pushing the more complex (and for them, more profitable) loans. When they are steered toward the 30 year fixed (less comples, for them less profitable) they become less reponsive and less excited to do business. The emails take longer, the phone calls are less urgent. You can feel them deflate, resigned to the fact that the transaction will not help them meet their lease payment or pay for their own %100 financed loan.

[Mike Roe]

This entire transaction smacks of ignorance and deception, but not as it may seem. The decpetion is wholly on the part of the mortgage broker who obviously did not explain the Pay Option ARM program properly nor disclose all possible ramifications. I defy anyone to find a mortgage broker that actually UNDERSTANDS HOW POARMS work, other than knowing that they lay back 3% on the back end with a 3 year pre-payment penalty. This is BIG money. The ignorance is wholly with the borrower for not investigating these parameters by pressing the mortgage broker for details. Unofortunately, there are few actual employees of LENDERS that can explain these parameters to ANYONE (just call Countrywide and ask how their 5 year POARM woirks and how the neg-am interest is calculated) let alone a greedy, take-no-prisoners mortgage broker. The best lender is always a reputable one - the banks. They MUST dislcose everything and rarely screw people over. Both parties here deserve what they got - a bad mortgage and the broker a lawsuit. Good luck to neither.

[kevin s.]

I am an educated person myself, and was the victim of a bait and switch tactic, in which I was promised one loan and sold another. That is how a number of people are getting suckered into option-arms. They can afford other, better loans (30-year fixed, 5-year ARMS etc...) and are not aware that brokers have a different agenda.

In my case, the amortization schedule, rate, and payments we were shown stayed the same (we thought we were getting a 6.1% 5-year ARM). What we actually got was a 1-month Option Arm. And this was through a "friend" of ours.

I played hardball, and got the broker to refi at no cost to us.

Should we have hired a lawyer to peruse the documents? Perhaps. Maybe we should hire a lawyer to accompany us for all purchasing decisions. If mortgage brokers are so disingenuous that it takes a lawyer to navigate their deceptions, then they ought to be introduced to those same lawyers after they have successfully deceived their customer.

What's wrong with expecting accurate good-faith estimates and TILAs beforehand? If a broker is going to claim that he or she is not responsible to provide this, then something is wrong with the system. Whether or not you feel sympathy for this couple, foreclosure resulting from fraud and deception deteriorates land values across the board.

[www.BetterVillage.com]

Kevin: the reason banks and brokers and correspondent lenders love(d) the option arm is because there is so much "juice" in it for them that you don't see unless you study the final hud carefully (if you're lucky). It's so easy to hide a 2-3 point or higher YSP (legal kickback) when the borrower has been dazzled with their "low fixed payment." Yes... see a lawyer (a good one, an ethical one). BUT AGAIN... not all brokers have a different agenda... those that are members of the UMBA commit their fee in writing and pledge a fiduciary duty to you. They are willing AND able to be held accountable.

[Cal]

Funny thing is in California a mortgage broker doesn't need to "pledge a fiduciary duty to you", it is mandated by law.

There is so much liability just floating out there I think some of the big law firms are waiting for it to get really bad before jumping in and doing their thing.

[www.BetterVillage.com]

Cal: We don't know that Kevin's writing from California (did I miss that?). And yes, we all know that those that accept the duty don't always perform... but if they make it an emphasis, they expect to held to a higher standard. I don't know any attorneys or physicians that go around saying: "Hi, do business with me: sue me or send me to jail if I defraud you or someone else while we do business." Doctors have a huge "sue me" sign on their backs due to the ease in which they can be sued for malpractice. Keeps them from sticking their necks out. People tend not to sue attorneys out of fear. There will be good attorneys attacking bad lenders and bad attorneys attacking "not so bad" lenders. The legal business thrives on conflict (some of it on conflict prevention), as do the newspapers.