REAL ESTATE
by Jim Coleman, REALTOR®
MANY MORTGAGE LOAN PROGRAMS ARE FRAUGHT WITH RISK
Although some of my mortgage and lender friends may take offense to the comments in this column, there are a few burning points that need to be made. While money lenders typically put their funds to work at whatever rate and conditions the market will bear, the naive, uninformed and sometimes mislead, are vulnerable and subject to huge risks.
Recent financing programs have placed various types of loans on the market to try to feed the fast sales pace and to further market activity. The extreme appreciation rate and rise in prices have left many consumers behind and out of the picture of home purchase. So to assist in making buyers qualified, "non-traditional mortgage products" have entered the scene. Some of these are here cited below.
Simultaneous Second-Lien Loans. This program results in minimal and reduced equity and higher credit risk. A first loan is taken out at somewhere around 80 percent loan to value. Then the lender permits a second loan to be placed immediately behind the first resulting in essentially a 100% mortgage.
Risk Layering. Reduced or minimal documentation and unverified income adds to the risk level and increase concerns for repayment. Loans granted to parties who cannot demonstrate the capacity to repay the loan are quite unsafe and unsound and result in high rates of default and foreclosure.
Interest Only and Negative Amortization. One of the approaches and lending practices has been to be creative to minimize payment as much as possible since the loan is so large on high priced homes. To help make financing possible, programs have offered significant principal amounts with only a payment covering the interest accrual, or most of it. The interest only payment is just what it says: "interest only." It should be obvious by that method that there is no reduction in the principal, so the loan is not being reduced. Another version permits a payment that, although it does not quite cover all the interest for the installment, the deficit is delayed and added to the loan amount, hence the "negative amortization" or reduction of principal, in fact the principal increases.
There is a multitude of these kinds of concerns being expressed by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. A central point made by these groups with which I whole heartedly agree, is that loan programs should not be undertaken that requires the sale or refinance of the property in order to satisfy, clear or otherwise payoff a loan. Buyers and borrowers must approach the acquisition of a loan with the full impact understanding that the debt must be satisfied. Unfortunately, all too many borrowers either do not comprehend the risk factor or enter into the loan not caring whether or not they are able to satisfy repayment. The default condition can prove to have serious impact on credit and overall personal economic stability of the individual and a household.
St. George REALTOR® Jim Coleman is Associate Broker and Partner/Owner of ERA Brokers Consolidated. He works with Buyers and Sellers and Specializes in Residential, Investment and Commercial Real Estate. You can contact him by e-mail at Jim@RealtorJimC.com. Call: (435) 674-0600; or write: Jim Coleman, 201 East St. George Boulevard, St. George, Utah 84770. This and other columns are available at www.RealtorJimC.com/articles.