It’s no secret that the bottom continues to fall out of the housing market in most places across the country. The credit crunch has directly effected both sub prime and prime borrowers as well as earnings, Wall Street bonuses, and employment numbers (lots of layoffs on the Street as well). So why do I continue to receive to good to be true mortgage offers in my inbox every morning?
Carroll Lloyd of SFGate.com recently wrote an excellent explanation of What’s behind the continuing bombardment of too-good-to-be-true mortgage solicitations? Check out the post in it’s entirety but here’s a peak at some of what Carroll has experienced:
In the past few weeks, the mounting offers have formed a mountain on my desk, each offer promising a mortgageable moon, each aiming for a creative slant on the old chestnut "Here’s a deal you just can’t pass up." (Or as Lenox Financial — the controversial "no closing costs" (i.e. higher interest rates) lender likes to put it in its radio ads: "It’s the biggest no-brainer in the history of mankind.")
Some offers focus on turning the idea of equity into a lifelong solution for any problem. A mailer from US First Credit Union unfolds into a 16×24-inch blueprint of a fabulous house. On the house plans, various rooms are labeled according to what they can buy you: a new SUV, a college degree, bill consolidation, etc. All you need to do is take out a home equity line of credit: a 15-year fixed for "as low as" 7.49 percent. And because they "want to wake you up to days full of excitement and possibilities" (Hey, who wouldn’t want that?) the company is including a "FREE 3Day/2night Getaway" to 22 destinations.
Other companies focus less on the life of infinite possibilities and more on the world of insurmountable woes. A notice "from the desk of Angie McGuirt" at Wachovia bank, informed me that I was "pre-selected" (always good for your self-esteem) for an equity line of $250,000 with a variable rate of Prime minus 0.5 percent — now amounting to about 7.75 percent. If this sounds like a so-so deal, Angie reminds me that it’s "far less than you’d pay for most credit cards or other personal loans." (In other words, "You’re probably hemorrhaging money every month, let us stanch the wound.") Um … yes, but you can’t lose your home using a credit card. I call Angie to learn more about the deal, but the broker informs me that no one will speak to me because I’m a journalist. "We refer all journalists to the Web site," she says. What about Angie? "She doesn’t take incoming calls."
She shares another recent offer for a 1% loan regardless of credit history or bankruptcy. Just this morning I received an e-card from Countrywide suggesting that now is the time to refinance and their website touts Low rates may not last. Don’t wait, refinance today. So that’s not as bad as the 1% loan offer but as Carroll Lloyd points out, refinancing to pay bills isn’t always a wise move. You won’t lose your home from credit card debt.
To answer the question of why these solicitations continue to bombard us, Carroll suggests that you have to understand how mortgage brokers are paid.
There are primarily two ways brokers are paid. One is through "points," in which a home owner pays a percentage of the purchase price up front at the time the loan closes. A 1-point loan means a 1 percent fee. Another more often misunderstood means of paying the brokers is "yield-spread premium." In this scenario, the borrower pays a higher interest rate for the life of the loan in exchange for a "zero-point loan." The broker gets the "spread" — i.e. the difference between the "wholesale" rate from the lender and the rate that is passed to the consumer, which can vary from as little as .5 percent to more than 1 percent.
Need I say more? As Robert Youngjohns states in Carroll Lloyd’s article:
Youngijohns suggests that complex commission structures often lead to what he calls "bad behavior." "I was raised Quaker and so I was taught to see the good in everyone," he says. "Until it comes to people’s commissions — then you have to assume they’re fundamentally evil."
Now although I completely understand and appreciate where Mr. Youngijohns is coming from, I have a little bit of a problem with this generalization and feel like it was used more as an "exclamation point" for the end of the story. I have worked with a multitude of mortgage brokers over the past 16 years and have no doubt had some "interesting" experiences but that’s another story. The greater percentage of those who have done loans for my wife and I, my colleagues, and many of my clients have been very clear about the costs involved when borrowing. And I also think it should be mentioned that 99% of the unsolicited email, faxes and "snail" mail that we receive goes directly in the garbage. It also appears that nothing will put a stop to this barrage of offers more than consumers not responding to them..