Should teaser mortgage rates be illegal? (A hyberbolically discounted examination)

i think disclosures should be better. that's as far as we can go. short term rates may be good for somebody who is in the position of selling the house. if they know they will be moving in 2 years to go to grad school or whatever the reason may be, why would they pay 30 year fxed rates?

That's an excellent theory. It seems you did your research and found a lot of other great "reputable" sources to back your opinion. However, let's consider a couple further points of logic (which may not be endorsed by Harvard research, but simply make sense). 1) People have debt. This country is built on debt and grows on debt. Debt both motivates and allows for potential possibilities that would not be possible if it were not for debt. With that said, we (as individuals) have the right to choose our path and future. Thus, you have the ability to choose how to spend your money. 2) You'll never get up the stairs if you don't take it one step at a time. In regards to debt, sometimes short-term steps are required to reach long-term goals. 3) Everyone has a unique situation. Example: You lost your job, have a family of 4, and your wife/husband does not work. You got backed up in debt because you were sucked in by “teaser” prices at the mall offering back to school savings along with that “great teaser deal” you got on remodeling your kitchen. Now you live month to month until you pay down the bills a little, but with out a job you risk loosing your home. What do you do? Foreclose? Ask a friend (what if you can't borrow the $50,000 you need from a friend)? Or, refinance into an interest only loan that allows you to reduce your total balance by paying off your other debt and paying interest only. Once you get your new job you start paying toward the principal and are back on track. Is this client in over his/her head? Are they stretched too thin? YOU BET! Is that the American way? Absolutely! Life, Liberty, and the Pursuit of Happiness. Is there a cost to these virtues? Sure. But, if that minimal cost and risk means getting you that much closer to your “happiness” (not foreclosing and having your family kicked to the curb) then it is worth it. Should consumers be aware? You bet. The future is not certain, but now is. The answer is not to eliminate these programs. The answer is to help people accomplish their goals, regardless of whether it makes long-term sense to a “rational economic man [who] assesses future financial costs and benefits by applying a constant discount rate.”

I have to think that, as the debacle continues, that the market will work this out for itself. As risk begins to be properly priced, banks should begin to look at a one-year ARM to a household that could not afford the rate following the teaser to be an extremely high-risk loan, and therefore that loan will be sellable only at a steep discount. So, instead of pricing out a loan to an investor that yields 1% this year and 8% thereafter, it really is 1% this year, and 8% * say a 30% chance of total default. Not a real attractive investment. So, I think these things will become basically unsellable, therefore will disappear.

Ok say they did and some more disclosures to the loan process. How many of you actually read them line by line and even if you did. Did you know what they were saying. Teaser rates should be legal but used with caution. If you are in a Demand cycle and your house's vaule is going up why not do a short term rate like that. It will have gone up more in value.

A person who rationally evaluates the financing decision would probably not fall victim to the hype that comes from some lenders. I've been a mortgage professional for 25 years. Based on that experience, most borrowers spend less time shopping for a mortgage than they would spend shopping for a new shirt. Probably 80% of borrowers go with the realtor's recommendation. Most realtors I've met don't care if the buyer gets a loan product that is best for them (the buyer). Rather, the realtor wants the sale to close so the commission checks will be cashed.

Further, many buyers are afflicted with the HGTV disease. They've seen it on TV and they have got to have it. I currently manage a first time home buyer program that limits customers to those who earn less than 80% of median imcome. In the last two years I've had several potential customers reject the program because we won't pay for granite counter-tops. They went out and found a stated income, sub-prime loan that would allow them to have the HGTV look.

Other buyers are looking for someone to say what they want to hear and they will keep shopping until they find someone who will. So, many loan originators are willing to accomodate them. They tell them what they want to hear during the initial application and then process the loan using a program for which the buyer actually qualifies. Usually, these originators are the ones that don't attend the closing and the borrower is shocked to find the terms at closing are different that what he or she thought they were getting.

I think the solution is for the mortgage industry to work something like the current V-8 commercials. When the borrower comes in and says "I've just got to have one of those stated income, option arms with a start rate of 1.5%" a hand comes from nowhere and bops them in the forehead. Maybe that would knock some sense into them.

Pretty sad when the sponser link for this article is

Refinance at 5.35% Fixed

Get $300,000 loan for $875/month. Calculate Your New Payment. Act Now!

Refinance.LoanOffer.com

I find it very amusing that at the end of this article the first sponsored link is to some miscreant offering a "5.35% fixed rate mortgage with only an $875 monthly payment on a $300,000 mortage". Simple interest ALONE would be $1,337.50 per month.

RE agents and loan brokers are highly incentivised (is that a word?)to place people in homes. There are no regulations that are enfored that require them to offer suitable homes and loans based on the customers financial strength and paying ability. They are not required to do what's best for their customers. All they want to do is push people into the most expensive home possible to get their huge commissions. It's wrong on so many levels.

Thanks for the calculation, Phil! I clicked through on the ad and couldn't get any of the terms on the loan without telling them all about me, so I don't know what sort of magic they use to get that $875 payment.

The main problem is being overlooked by everyone. How many states require Loan Officers to be licensed? Even if they do, like I was in Ohio, it is a joke (Legislation only a few years old when I started). Everybody is blaimg these Subprime Lenders, when they should be looking at the Loan Originators. I persoanlly was always honest, which is one reason I had to get out. The Loan Origiantor market is saturated, and when most positions are 100% commission, Loan Originators will do ANYTHING to close a deal. They aren't worried about the customer, they are concerned with getting a paycheck that month.
We need the subprime lenders because no matter what they tell us about the economy, most people aren't in the 20% down, 30 year fixed boat. Most people move or refi in 5-7 years.

By The way, a few lenders do use the future rate increase as a qualifying factor. It may be 1.5 to 2 points higher than the teaser rate.

The other problem, There is no such thing as a 1.5% rate! It is a margin less than the interest only rate, which means the borrower will at some point have to pay back this deferred interest (difference in payment between margin and interest only payment). Countrywide is in trouble because they were one of the first to offer this pick a payment plan. You choose between the low margin, the interest only payment, a 15 year fixed payment, or a 30 year fixed payemnt each month. It was sold as "backstop plan". People where convinced they should make the 30 year payment and use the margin as a backup incase they had a rough month. But we know most people when given a choice, will pick the lowest possible payment.

the teaser loans were a great idea... in theory.. there was a good balance of risk to reward for all parties involved.. unfortunately poeple did not know how to navigate these loans nor prepare themselves for when the laon recasts. Many people were given these loans that essentially gave them a "second chance" - virtually anyone can go from a subprime borrower to a A paper borrower in 2 years; it takes only discipline and and understanding of how credit and money works. The kicker is that this "theory" assumes that the mortgagees have the intelligence, understanding, and motivation to make a change.. bad habits rarely change.. someone outta tell the braniac investment bankers that dream up these loans to take some courses in human behavior; they understand the need and desire for money, but little else.

i love the loans for their "second chance" appeal to those who could use the help.. but there is too much abuse of the system; A free market will never protect the ignorant, ever.

Simple solution

Cap the payment increase at 7.5% per year, no matter the rate, and negative amortization. This puts the risk back on the lender to make a reasonable loan. The borrower needs about a 3% income increase to cover this.

While this is being discussed, why not throw in the mess we call the credit reporting system. A medical collection for $20 could set your FICO back 30 points in seconds, but it could take a year or more to get these points back. You pay off your car, but it doesn't show as paid until 7 months later, even with calls to the 3 Bureaus and the lender. You pay your mortgage on time for 18 months and your FICO stays the same. A credit card company has the right to lower your available balnce and raise your rate setting off a FICO lowering avalanche...

Some times people are forced to take teaser AMR because they will not qualify for slightly higher fixed rate under whatever regulations. That for sure must be made illegal, because it is like knowingly setting a trap from which not everyone can get out, or have to go through endless refinancings.

It's the loan officers. What they say isn't in writing, so they can't be held accountable! Yeah, it's in the fianl papers, but who wants to read through and understand 40, 50, 80 pages of legal stuff. Maybe lenders should make a one page summary of everything (The TIL doesn't suffice!).

We need ARMs because most people don't fit in the 20% down 30 year fixed bucket and most people don't plan on staying in the same house for 30 years anymore.

As usual, the Federal Reverse did not get into regulatory mode until the horse was out of the barn

Download the release from the Fed and scroll through it to the last few pages - one disclosure is shockingly blunt so I give it no chance. The other is the normal mumbojumbo that financially illiterate people don't read.
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070814/attachment.pdf

PLEASE comment to the government on this document - the document identifies lots of ways to comment such as emailing the Office of the Comptroller of the Currency at regs.comments@occ.treas.gov, referring to Docket ID OCC-2007-0013 in the subject line

Adjustable Rate Mortgages are awesome!

I was able to get a $485,000 dollar house with $26,000 down and I only had to pay $1,400 a month for it at first. My house is 3,500 sq. ft. and is in a nice area. Even though the rates adjusted, I do not feel the crunch because other investments I made have started to pay off. The ARMs were a perfect loan for me because I could get a huge house for cheap and use the money I was saving to invest in funds and stocks. If I would have gotten a fixed rate 30-year mortgage, my payments would stay stuck at $2,700 a month. I invested that $1,300 a month and now I should be able to pay off my house in ten to twelve years. My investment gains will be poured into my house now. The higher rate is nothing to me.

Most people just wanted a big house for cheap. But they should have used the money saved from the ARM to invest. The bubble was a great time for a smart person like me because it allowed me to make some good money on the side. Once the house is paid off, I can use the money I was paying for my mortgage to invest again. As usual, only the fools lose.

I feel so good about being so smart!!

The biggest problem with ARMs is that, despite being touted as a savy financial tool, they have been quickly sold to people least able to understand their potential risk. Historically, ARMs have been great for people with relatively short term housing needs. Recently, they have been used to leverage ever greater amounts of debt, which in turn makes borrowers even more sensitive to interest rate increases. Interest only and negative amortization loans are even worse. It's no wonder that defaults are on the rise when the people who stretched themselves too thin are getting hammered with large increases in payments.

No it shouldn't be illegal. People just need to use a little bit of common sense before taking out a loan. This is where Americans tend to not be very bright.

And the Fed needs to keep its nose out of things for a while and let the market correct itself. Quit trying to give away credit. This is what got us in this mess to begin with. You just don't finance your way out of a credit mess. It takes a little pain to recover. If you try and finance your way around a recession you just may land yourself in a depression. Quit meddling with the markets.

"Quit meddling with the markets."

Exactly. Let the foolish and greedy people live on the streets for a few months to a year. They will smarten up for the better. This housing crash is fair punishment for all of the people that fooled around without calculating the risks.

with the tighter guidelines being put into place, the borrower will need to be approved at the adjusted rate and payment. this will make it harder to get these loans and, in theory, should show the borrwer what the rate and payment will be after adjustment.

Good article. My response below is analogous to the contents of this article but speaks of the credit card industry in this country.

I'd have to say that as much as I'd love to make it illegal but there's just something inherently wrong with passing laws to protect people from their own ignorance.

Republicans have a point when they say that people need to be responsible for their actions, e.g. credit card debt, however they conveniently turn the other way when it comes to how credit card companies market to consumers. I mean seriously, my wife and I receive anywhere from 2-5 credit card offers in the mail every week. If we weren't more fiscally responsible, we'd be part of the majority that contributes to the massive debt American consumers are paying. The biggest problem is that credit cards allow people to live beyond their means and those without self-control are the ones who pay (literally) for their mistakes.

So, while I agree that people need to be educated and be responsible for their actions, companies have to be somewhat regulated in how they dangle the carrot in front of us. That said, if people just stopped using their credit cards, the marketing campaign would eventually die. Or maybe that's just me living in my perfect world scenario...

BJ, if interest was accumulating while the person paid the 1.5% "interest", I would consider that fraudulent. The term "interest rate" refers to the rate at which an unpaid debt accumulates. If someone tells you the interest rate is 1.5%, when in reality that's just the "payment rate", those people should be prosecuted for fraud.

If I pay e.g. 4% of the balance the first year, after which my debt increases by 5%, the correct interest rate to describe that transaction is 9%, not 4%.

What's suprising is that this blatant misuse of English appears to be pretty universal.

3 more comments:

1)The "teaser" rate after the article is based on a deferred interest program. Not always a good program for most people. But, educated people that can easily calculate the interest payments must have known this already.

2) ARMs don't always adjust the full amount so there will be no way to tell what the new payments will be if they adjust up, only the worse case scenerio.

3) While we are on the topic of complaining about mortgage teaser rates lets also attack any other marketing campaign out there. Zero down Zero a month car loans (teaser), Monthly-quarterly August 28 at 4:32p.m. Huge Blowout Sale at the local furniture store, and all stock investments should highlight, bold, capitalize, and increase the font by stating that these investments are not certain and you may not get what you expected... we could make a summary page.

Again, the point is that no matter what the transaction a "smart/rational" person will follow the traditional theory of "Buyer Beware." Overall, these programs WILL tighten guidelines as the market corrects itself, which will limit the amount of abuse. But, these programs still make sense for various situations.