Another edition of mortgage sleaze – pay option ARM style

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Oh, the joys of mortgage fraud, deception, lies and HUGE paychecks. Some people have no problem ripping honest people off in the name of $250,000/year salaries. Today I share with you one of my OTHER favorite mortgage stories, outside of the New Century YSP deal, and this one comes to us courtesy of our friends the pay option loans.

A quick note on pay option loans, if you are in one, please email me, please call someone you trust, please make sure you understand them, when they are going to reset, how much money you are losing and if you can afford to make at least an interest only payment. If you are in one you are probably losing between $500 – $1,000 (or more) per month of equity out of your house. Your interest rate is probably around 8%, and if you have been in it for awhile you are probably close to the recast – take action now please!

Back to the story – mortgage brokers make huge commissions on pay option loans. The bank usually pays the broker (or an originator at their office – it’s not just brokers) up to 3.5% on the back of the loan via yield spread premium. Take a nice $300,000 loan and you’re earning north of $10,000 on each loan. Selling these loans can make someone a very comfortable living.

There is a company I know of in San Diego that sells ONLY pay option loans. They make huge commissions on up to 80 loans a month. This is how it works. You call them up and ask for a loan. You get talked in to a low payment, pay option loan. You like the minimum payment, but want to know if it is a fixed loan. You want a 30-year fixed. You ask "Is it a 30-year fixed?" they say "Yes." You say "Great" and go along with the process.

When it comes time to sign you see all of these disclosures about adjusting rates, negative amortization, payment changes, rate caps, etc. You freak out and call them. Your loan officer says hold on. A new voice gets on the phone – a woman – and she tells you – YOU’RE READING THE PAPERWORK WRONG – IT’S REALLY A FIXED LOAN.

She is an expert at the loan documents, knocking down each of your questions and objections, talking circles around you and making your head spin. She convinces you that it is OK to sign. You sign and then start to doubt if she was telling you the truth. You try to call them knowing that you have 3 days to rescind. No one answers the phone. You don’t want to lose the loan, so you don’t rescind, you HOPE you have a 30-year fixed.

Congratulations – you have a pay option loan, with a high interest rate and a nice negative amortization feature, and TOSS a 3-year prepayment penalty in to boot.

This girl gets paid $20,000 per month to talk to all of the company’s customers like you – to talk you in to staying with the loan. She’s done it more times than she can count. She loves making the money and "closing" people. She laughs when she tells the stories. She should go to jail.

Please remember that if you get in to a situation you are uncomfortable with you have 3 days to rescind your loan (if it is on your primary residence and it is a refinance). Please do not be afraid to take that option.