Some brokers will be BROKE-r than others

Since the market is definitely slowing down, I am having more time to talk with some of the brokers I visit. I like getting to know the brokers and building a relationship with them. I had really some really good conversations with a few brokers this week.

There were a few that I could tell were not happy doing what they are doing. Even though they have no formal financial background, they knew that many borrowers were setting themselves up for financial failure. One broker said "80% of the people I'm seeing now should NOT be doing a loan". Another one was telling me how they just cannot put borrowers into neg-am's (see my long option-arm post below for more info). They see other guys in the office making huge money and driving BMW 745's by sticking as many borrowers as possible into option-arms with the 3pt rebate. It was especially refreshing since this broker was in his mid 20's. The broker lives beneath their means...and as hard as it is, is not sidetracked by some of the other guys in their early 20's that are making 15-50k per month.

There are also quite a few brokers that have lost that "excited" look on their faces. I guess now that things are slowing down some, and that 20k a month isn't rolling in as easy now, it is putting a little stress on some people. I know of a 1 broker for a fact that refi'd so they would not be late on their mortgage. I know of a few others that are starting to stress about the 3-6k mortgage payments and other bills. The money isn't "easy" or "guaranteed" like it was the past several years.

BUT...there was also the broker that I talked to, who commented on how slow things were. I said "yup, most borrowers are maxxxed out...what can you do to help them?" The broker then proceeded to tell me they have some clients that are using credit cards to pay their mortgage. I played dumb..."are you kidding me??" Nope, the broker said, it really isn't that big of a deal....I HAVE DONE IT a few times when there have been slow months. Then they said that having a big mortgage payment "motivates them to work harder". Isn't that a nice thought process.

Yeah, I like to hit a bee's nest with a stick before I go for a run...it "motivates" me!!

Some real "classy" marketing...unbelievable

So I happened to accidentally click on one of those google mortgage ads while I was using my laptop (my wrist bumped the little finger pad while typing.) I didn't think anything of it, until I started reading a quick snip of how they described "stated income".

Check out this explanation of stated income from a broker website. I cut the part out that I want to talk about, and put it below.

"No Doc / Stated Income Loans are the most commonly used and least expensive product in the reduced or no documentation suite of programs. These loans are often the perfect choice if you have verifiable employment (self employment is fine) and assets but your verifiable income is just a little low for what you want to do."

That is NOT the intended purpose of stated income. It was designed for people with hard-to-document income, usually self-employed borrowers. It is NOT designed so that you can LIE and say you make X so that you can afford Y. That is just blatantly saying "it is OK to lie on this loan", and not only that, but that is how they are marketing the loan!! The problem is that they are by no means the only one that will tell a borrower to "just state more income" so they can "do what they want" to accomplish. PLEASE don't let people fall for this rationale and end up buying way more house than they can afford.

OK, hold on a sec....I was clicking through this website some more and I'm finding even more great "information"...yeah right! Check out this explanation for "no-doc" loans...

""Mind Your Own Business" or "No Doc" Loans
Have you ever wanted to tell a lender to mind their own business? Well, now you can. If you're turned off by the invasion of privacy and the hassle of paperwork that usually goes with getting a mortgage loan, we can help. At California-BadCredit.com we offer loans that allow you to keep your business to yourself.

Let's face it, it takes lots of time - and even accountant's fees - to collect all the paperwork that most lenders require. Pay stubs, 1099s, W-2s, tax returns, bank and brokerage account statements, you name it - they want it all.

For people who prefer a high degree of personal privacy and low degree of hassle, we offer No Doc loans. And when we say No Doc, we mean it. Zero, nada, nothing, zilch!

Depending on the loan program, you simply need to be able to claim enough income to qualify for the loan and show enough collateral to secure it. In addition to no documentation, your application won't even list information about your income, employment or assets. Generally, these kinds of loans are only available for people with good credit and tend to be a bit more expensive than loans with standard documentation. But that can be a small price to pay if your financial life is complicated or high profile or if you simply would rather keep it yourself.

What's more, if you're considering a purchase, a No Doc loan can get go up to 100% loan-to-value. Some programs, such as "103s" will even pay closing costs so you have no out of pocket expenses. That way you can use your extra money for things you'll need for your new home, like furniture and gardening supplies. "

So wanting to BORROW money from somebody is an "invasion of privacy"?? Are you kidding me?!?!? Like it is REALLY hard to get a W2 and a most recent paystub to verify your income? Yes, some are a lot more complex, but from what I have seen, very few people fall into this "complex" criteria where verifying their income is THAT hard.

So there you have it...check out the website to see it for yourself. I have seen their ads on all of the "bubble" blogs, and I'm sure it has even rotated through this blog. The good news is that most people visiting here won't be falling prey to their marketing.

Are you really surprised that people making 40k a year are able to get loans for $400k condos?!?!?

The Lenders Rationale

Since everybody has seen some of the crazy loans out there, the question comes up....WHY would a lender make that loan?!?!??

First off, a large part of it has to deal with the fact that most of these loans are packaged and sold as mortgage backed securites (MBS) within 30-90 days of funding. These loans are sold to investors/financial houses/hedge funds/individuals/etc. and end up all over the world.

**Let's take a moment to get something straight here, ever heard of "conforming" loans?? Those are loans that meet Fannie Mae/Freddie Mac criteria. Aside from some of their programs that help poor/needy/special case borrowers, they are NOT buying the "creative" type loans that you hear about. They are buying mostly 15 and 30 year fixed rate mortgages with loan amounts up to $359,650 (which just now went up to $417,000). If the loan-to-value (LTV) is over 80%, the loans require PMI (mortgage insurance). They are NOT buying Sub-prime mortgages. That is why sub-prime is considered a "non-conforming" loan. That is a very basic rundown of fannie/freddie. I am by no means an expert on all that they do, and from the looks of it, I don't think they know all what they do. Anytime a company (yes, they are private companies) needs to hire 1500 accountants to figure out what is going on....it will be over MY head ;)

Ok, now back to where I was going...

When I was underwriting for one national subprime mortgage company, if they got a really "ugly" loan, they would shop the loan with certain investors BEFORE making the loan. If an investor would purchase the loan, then we would continue underwriting/processing the loan. This did not happen all the time, but it would happen on certain "ugly" deals that had a "make sense" element to them.

As "crazy" as many of these loans sound, there are parts of them, that if they make sense, will help a lender make a loan. The first is LTV. If the LTV on a certain loan is low enough (at least under 80, but the lower the better), the more lee-way a lender will have with FICO score, credit history, etc. Would you lend $300,000 to somebody on a stated loan at 95% LTV with a FICO score in the high 500's or low 600's and maybe a mortgage late here or there? NO WAY, but would you do it at 60% LTV? Probably so. The bwr has $120,000 of his own "skin" in the game. Even though he is going stated, has had some credit issues, that bwr does NOT want to lose his $120k in equity. Worst case, he does default, and the bank (or investor that bought the loan) gets his 300k house for 180,000.

BUT what about the "housing froth/bubble/bubbelette" that might be going on. Well, that is why the banks will make the loans at lower LTV's, but not higher LTV's. Now that property isn't going up 10k a month, the banks ARE getting tigher (some more than others at this time) with lending to borrowers at 90 LTV and above. So does that make some sense?? Why a bank/investor would take a chance on a loan at a low LTV.

I could go on and on. If the bwr has STRONG verified income, or strong assests, then they will be afforded more leeway with LTV. The lenders are NOT completely stupid...although sometimes I wonder what they are thinking. Again, I'm a mere peon in this whole mortgage industry. I only wish I could see all the numbers the top exes see. Maybe they see something I don't....I only know what I see in the "trenches" and hear from my counterparts in the industry.

I do know that things ARE getting tighter. Maybe not as fast as I, or others would like, but it IS slowly starting to happen.

Post any direct questions, and I will do my best to answer them. You can also e-mail me at socalmtgguy@gmail.com

Loan business is slowing...so brokers go speculating

We are officially in the "holiday season" and it is typical for things to slow down some. I went to a few offices today, but I really want to talk about what I heard/saw at 2 offices.

In one office, the broker was all happy because they were buying another property! The house they bought in Phoenix has "gone up $200,000 in 6 months!" so the broker was going to buy another "cheap" house in the 250-280 range. They bought their current house for about 375k or so. Another house in the neighborhood just went on the market for 620-640k. So the broker put theirs on the market to sell in the high 500's. Their house is nicer than the 600k one...so they figure buyers will see the price tag on that house, then see their house as a "great deal". They haven't sold it yet...but "it won't be any problem". The broker told me that they can't wait for 2007, because they are going to keep buying properties with the equity...and flip them every 6 months for the next year or so. WOW! I wish I had thought of that. I just nodded, smiled, and wished them luck.
I didn't even bother bringing up the staggering increase in inventory of over 24,000 properties. I told them a while back to be careful with the Phoenix market...but they "proved" me wrong with the 200k "gain" in 6-months. Oh well. It will be interesting to see how it all pans out. Maybe I'm totally wrong and property will continue to skyrocked people into millionairre status by flipping houses for another 12-24 months.....or maybe not.

THEN I went to another office where both of the brokers were out of town. They had flown to Texas to buy some investment property. I think the property that they are buying can actually be rented at break-even, or maybe just a little bit one way or the other. I don't know all the details, but it is just interesting that because the "loan business" is slowing down some, that some brokers are starting to speculate on real estate at this point in the game.

That reminds me...the first broker thinks they are getting "good deals" because people are getting hesitant around the holidays, and they want to get in before things take off in the spring again.

What do you think?!?!?!?!?

"I need to do a refi cash-out to get money to pay my mortgage."

Yes, you heard me correctly. I am seeing more borrowers that are refinancing to get cash out so they can pay their mortgage and "stay afloat". Yes, it seems that the mathmatically challenged "buy-now pay-later" American home buyers don't seem to understand that taking out a bigger loan to pay off a smaller loan is NOT a good long term financial strategy.

Here is a scenario: Bwr with a FICO in the 550's, is currently 2 months behind on their mortgage, and needs at LEAST 85% LTV, but would like to get 95% LTV on a refi cash out. They are going "stated income" (of course), and they need a loan for somewhere in the 420k-450k range. They want interest only...but the broker said "they will take anything they can get at this point". They need money to keep paying their mortgage. How do you like that?!?!?

I had another one today where the person had 12,000 in equity and wanted to pull it out to help get through the holidays and pay their mortgage. Poor broker only had 2 weeks in the business...and thought he had a "live one". I had to squash the bwrs dreams of a fancy holiday...and the brokers dream of getting a paycheck off this "loan". 12k would barely pay all the fees assocaited with doing a refi on a 400k property.

These are just 2 that I saw today! I could go back through my scenario book and there are plenty more. The sad thing is that NOTHING surprises me anymore. It just amazes me that somebody will "spend" $500,000 on something (a house), yet they won't spend 30 minutes doing research to figure anything out about the process, the loan, the collateral, the people involved, if it really makes sense.

There is going to be sooooo much annoying whining coming down the next 2-3 years, you are going to beg to be stuck in a room with Gilbert Godfrey instead of hearing the all these "sob stories".

(no offense to Gilbert...but can you think of a more annoying voice?!?!?!? Maybe that Janice girl from Friends....yup...the "chandler-bing" chick with the terrible laugh)

You get my point...

******After reading some of the posts, I want to make it clear that NOBODY tells the lender directly the refi is to get cash to help pay the mortgage. I have seen loans declined when it looked like that is what the borrower was doing. That is the dialogue between the borrower and the broker...and I deal with the brokers. When asked what they plan on doing with the cash (if/when they ask) the 2 main uses are debt consolidation and/or home improvements. I will make a post here shortly detailing the rationale of the "lender" side of things.

The housing bubble created by a credit bubble and poor banking standards

I hope everybody had a good Thanksgiving holiday.

I came across this article by Gary North on lewrockwell.com. I suggest you click the link and read the whole thing, but I want to focus on certain parts of it below.

http://www.lewrockwell.com/north/north416.html
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ILLIQUID BANKS

Bubbles always continue for months or even years after old timers say they will pop. Old timers have trouble estimating the fear of the buyers at being left out and the fear of lenders at being left out. The two sides debtors and lenders keep the dance of doom going much longer than old timers can imagine possible. But eventually the dance ends.

I spoke at Lew Rockwell's conference. One of the speakers is a banker. He lives in Las Vegas. He was taught by Austrian School economist Murray Rothbard. He earned a masters degree in economics. Then he went into banking.

As an Austrian School economist, he understands the business cycle. He understands that the Federal Reserve system has pumped money into the economy, creating a housing bubble since 1996. He knows this boom will bust.

He has no illusions about this housing market. Compared to him, I have been Pollyanna. He spoke of the mental outlook of the builders in Las Vegas. They all know it can't go on, but they are determined to party until it does. "Then they will declare bankruptcy and start over," he said. This is their exit strategy.

A one-acre lot sells for $200,000. Then the developer must build a home on it to sell. But rising building costs since Katrina are creating disasters for their plans. They are coming to him for extension loans. He doesn't plan to make them. But there is no doubt that other banks will.

He was a participant in a panel that closed the conference. I was also a member. There, he tossed a grenade. He said that in his region, the banks' loans are 80% in real estate.

I sat there stunned, trying to take this in. He was not speaking of the savings and loan industry. He was talking about banks.

Diversification? There is none.

I still could not quite believe it. I approached him privately after the conference. I asked him if I had understood him correctly. "You are saying that bank loans are 80% in real estate in Las Vegas." "No," he replied, "I said in the 80s. In fact, it's the high 80s."

I asked if Las Vegas is unique. He said that he has heard similar figures about Phoenix and the southeast, presumably meaning Florida.

He explained that loans are first made to builders. Then they are made to companies that depend on builders. In other words, what may appear on the books to be a diversified portfolio is in fact tied almost exclusively to real estate.

The implications of what he said are staggering. The post-2001 boom in real estate is the heart of the American economy today. The housing market did not fall during the 2001 recession. The FED pumped in fiat money in 2001 to drive down the federal funds rate from 6.5% to 1.25%. That unprecedented fall in the fed funds rate provided the incentive for borrowers to buy a new home. The economy responded accordingly.

Now the FED is steadily raising short-term rates. Those institutional speculators who borrowed short and lent long the carry trade are now facing a squeeze. Short rates are rising. The spread between the cost of short-term money and the return on long-term money is shrinking fast. You can see this here.

We are not yet at the inverted yield curve, where 90-day T-bills have rates higher than 20-year T-bonds. This is a crucially important indicator. I explain why this is so important here.

THIS WILL END BADLY

There is a life cycle to personal investing. There is a life cycle in the capital structure. People grow old and die. They must be replaced. Businesses and churches must plan for the retirement of today's leaders.

How will tomorrow's leaders be able to move through the cycle if they are locked out of the housing market?

I asked the audience this question: "With the median price of a home this high, how will all those kids at the check-in desk ever become home owners?" I gave the answer in one word: "Later." The price of houses will fall.

There is another answer: "They will move."

In either case, today's home owner in San Andreas fault country will see the bubble burst. I think the mortgage market will do the job. But if I am wrong, then greener pastures will. California has lost 100,000 residents over the past year.

The American economy as never before rests on the housing boom. Yet this boom cannot be sustained much longer in the bubble regions. A recession looms. Even without a recession, the boom will falter because of ARMs: adjustable rate mortgages. These time bombs are about to blow, contract by contract.

If nothing changes if short-term rates do not rise monthly mortgage payments are going to rise by 60% when the readjustment kicks in. Yet buyers are marginal, people who could not qualify for a 30-year mortgage. This will force "For Sale" signs to flower like dandelions in spring.

The FED's present policy of announcing a .25 percentage point hike every few weeks is going to force the late-comers to sell. It is going to bash the plans of home builders, whose industry moves from feast to famine.

If you remember the S&L crisis of the mid-1980s, you have some indication of what is coming. The S&L crisis in Texas put a squeeze on the economy in Texas. Banks got nasty. They stopped making new loans. Yet the S&Ls were legally not banks. They were a second capital market. Today, the banks have become S&Ls. They have tied their loan portfolios to the housing market.

CONCLUSION

I think a squeeze is coming that will affect the entire banking system. The madness of bankers has become unprecedented. They have forgotten about loan diversification. They have been caught up in Greenspan's counter-cyclical policy of lowering the federal funds rate. Now this policy is being reversed. Rates are climbing. This will contract the loan market. Banks will wind up sitting on top of bad loans of all kinds because the American economy is now housing-sale driven.

You may think that you are shielded. But your banker is not shielded. You may not deal with bankers. But your employer does.

Your employer had better have a signed line of credit to keep the doors open. Without this, there may not be money to borrow when the housing bubble pops.

There will be great opportunities to buy houses at discounts during the down phase of the cycle. Be patient.

November 25, 2005

Happy Thanksgiving!!!

I want to wish everybody a Happy Thanksgiving! Have fun, enjoy the time off with friends and family, and keep checking Ben's blog for up to date housing bubble info. I will be checking in if/when I get a chance.

REMEMBER...credit card minimum payments are set to double in January. So take it easy with those credit cards over the holidays if you don't plan on paying the balance in full!

I don't want anybody that ready this blog or Ben's blog ending up as a FB!!

Have a great holiday...and keep checking back!

SoCalMtgGuy

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THIS is why I decided to do this blog!!

Here are 2 posts from one of the threads on this blog...and this illustrates exactly why I decided to do this blog!

Now I just have to figure out a way to make a living...by helping people NOT make terrible financial choices!! any suggestions?? anybody need a consultant???

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Poster from the blog said:

socalmtgguy said...
"I/O is part of it...but people are going STATED to QUALIFY on the I/O payment.

If people had to verify their income...then even I/O would not have added so much fuel to the market."
------------------

Responsible buyers have been competing to buy houses with this nonsense. First of all I'm mad (but not as mad as I would be if I were a recent buyer) and secondly, I'm scared for the impact on the overall economy. Irresponsible doesn't even begin to describe this.

And that idiot with the $28k income and the $800/mon car pmt wanting to buy a $400k house! Give me a break!!!!

Thanks again for the detailed info, I have been so mystified about what was driving this. That lending standards could fall this far was beyond my imagination.

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SoCalMtgGuy said...

THAT is why I'm doing this blog!!!

Before I got into this industry I was dumbfounded how soooo many people were buying homes that were soooo expensive!!

MOST people have NO idea that they are competing with people that are STATING their income to "qualify" for a 100% loan!!

The people that are actually making the money ASSUME that because people that are making less than them can "afford" a house, they should be able to get one as well.

THERE IS A HUGE DIFFERENCE BETWEEN BEING ABLE TO AFFORD A HOUSE...AND GETTING A LOAN FOR THAT HOUSE!!!!!

Bwr makes 28k...buys 40k SUV...now wants 400k house....HAHAHAHAHA

This bwr had a car payment of almost $800 a month...and only made about $28,000 last year. Wanted to buy a 400k home...but would look at a condo "if they had too". Somehow I don't think that spending 34% of ones gross income on a car payment is the best thing to do...but what do I know. That USED to be the rule when buying a house. Oh how times have changed. There is no way I was going to help this guy get a loan...but I'm sure somebody out there will "state" his income so that he will "qualify". This bwr has all the makings of AFB...but maybe they will be lucky...let's hope so.

Honey...I'm gonna buy the whole farm!!! ....just got me an OPTION ARM!!

It's disclaimer time again: all of these loan programs have their potential place in the market for RESPONSIBLE and knowledgeable people....and provided they are SOLD properly by the loan officer or broker. Some of what I'm going to say is just my opinion, and is does not necessairly represent how ALL option-arms are used/sold. There are lots of good brokers/loan officers (LO's) out there...BUT there are a lot that will do anything for the dolla-dolla-bill. My stories will focus more on saving bwrs from THOSE types of broker/LO's that I mention. The option-arm loan can get rather complex with the different indexes it is ties to, and each company does things a little differently. My overview is going to be the basics. Ok...lets get started!
---------------------------------------

as seen on a billboard, in the newspaper, in a mailer you probably got at your house:

RATES AS LOW AS 1%!!!!!!

You are probably thinking..."HOT DAMN...I'm going to save some money!!" Well, lets take a look at things first.

The "option-ARM" is a popular loan that gives the bwr 4 payment choices each month:

- a 30 year amortization payment option
- a 15 year amortization payment option
- an interest only payment option
- a minimum payment option

So lets say you want a $500,000 loan (bear with my numbers here...for EXAMPLE only). Here is an example of what your payments could look like (assuming a 1% start rate, 5% I/O, 5.75 fixed...again, just using numbers that were realistic in the past...these numbers would depend on the index):

$ 2917.86 - 30 year amortization payment option
$ 4152.05 - 15 year amortization payment option
$ 2083.33 - interest only payment option
$ 1608.19 - minimum payment option

SO...which payment looks better to YOU?!?!?? That minimum payment looks pretty good!! How did they get the payment lower than the I/O payment?!?!? That's EASY...take the $475.13 you didn't pay...and tack it on the loan balance!!! So now, after 1 month, you owe $500,475.13 on your $500,000 loan. Pretty cool huh! Sure, you "saved" $475 today...but what did you do with it?!?!?!? Did you save it? put it towards retirement? get a bigger car payment? or buy more property!?!??!?

There are a couple of things to know about this loan...actually, there are a LOT of things to know about these loans, but I'm only going to cover the basics. Each company does things a little differently (margins, indexes, resets, recasts, guidelines, etc)...but at least I will give you an idea of what is going on.

--- Notice I said a 30-year amortization payment, not a 30 year FIXED payment. Each of these payments changes in regard to the underlying index. The 30 year payment will fluctuate with the index. The indexes that are used are usually the COFI, LIBOR, MTA and there are a few others. The companies will use whichever index is performing the best at the moment (the moment being when you GET your loan). There will be a margin on the loan. The margin is added to the index...and that determines the rate that you will pay.

--- So what is the "MINIMUM PAYMENT"?!?!??!? The minimum payment is that everpopular 1% or 1.xx rate that you see.

LISTEN UP!!!!!!!!

What I'm about to tell you here is going to PISS OFF A LOT OF BROKERS AND LOAN OFFICERS!!

...but SAVE YOU A LOT OF MONEY!!!!

There is a LOT of money to be made on these Option-Arm loans. Brokers sell the "benefit" of the low payment...and bwrs jump in all to quick. Did you know that most lenders will pay 3 to 3 1/8's points back to the broker!?!?!? So that means...on a $500,000 loan, the broker will make $15,000....in ADDITION to any other "fees" charged. How did they get so much rebate?!?!? Well, they got the bwr a very nice 3 year pre-payment penalty. Sure, they could have done the loan with a 2, 1, or no pre-pay, but that does not pay the 3% rebate. A lot of brokers will say "I will hook you up. Pay 1 point origination fee, and the only way I can get you the 1% start rate is to take a 3yr pre-pay penalty. That means my fees are only $5000 which is less that what most people are charging". The bwr will agree...but not know they are getting $15,000 on the back from the broker by sticking them with the fat 3yr pre-pay penalty.

Can you believe that people end up paying over $20,000 to refi their house?!?!??! That is more than most people make in 3-4 months....and some "kid" working a phone made it in less than 30 days by putting in a few hours work. (yes, I know...not all brokers are kids, and not all brokers treat their bwrs with such disdain...but believe me, it happens more than you might think.)

I am starting to see things like this on credit reports (strictly an example that I saw): loan amount: $325,000 loan balance: $331,283 minimum payment: $982

So what that means is that the balance of the loan is higher than the loan amount...hence the term NEG-AM (negative amortization), and you see why...the $982 payment on $325,000. That "savings" has to go somewhere....and that somewhere is the back of your loan!

WHEW!! I hope that helps some. Again, not intended to be the most indepth overview out there...but should be enough to get the point across.

I do want to say that I do not know of a lender that will do an Option ARM to 100%. Most will do them for a max of 70-80% LTV, with 2nds or HELOC's behind them. These loans have their place for informed bwrs who are AWARE of the risks, and understand how they work. There are a lot of brokers that hate the loan even though it pays well. There are lots of brokers that DO disclose the "negative amortization" or "deferred interest" aspect of the loan...and make sure their bwrs know how risky the loan can be...and how payments can change. The reason I'm doing this blog...is so that people can be INFORMED and make the right decision for themselves. If they have to learn from the "pain" of others, or I have to point out the "misleading" ways things are sold, then I will do that. I sleep well at night...

Leave comments or send me e-mail. (socalmtgguy@gmail.com)

Some general mortgage info...and answers to some posted questions

Ok...so my whole point in doing this blog is to give MY opinion of what I am seeing in this industry. Apparently, people think that is a pretty cool thing....somebody in the industry that is not all smoke and mirrors and who will give a straight opinion of what they are seeing on a daily basis.

So that said...I'd like to answer some questions that have been posted...and give some general mortgage info.

1. What is a pre-pay penalty?!?!? A pre-pay penalty is just that...a penalty for paying off your loan before a set period of time. Pre-pay penalty's can be "bought out" in the form of higher rates (usually 1-1.5 points added to the rate). Most of your subprime loans and "creative" financing loans have them. Most 2/28's will have a 2 yr ppp (ppp=pre pay penalty), most 3/27's will have a 3 yr ppp, and most of the "option-ARM's" are SOLD with a 3yr ppp (I'll talk more about the option ARM's below).

There are 2 types of pre-pay penalties: soft and hard (yes...the hard one "hurts" more). Companies have different rules with regards to the pre-pay and the type of loan. Lots of "a-paper" loans will have a soft prepay, which means, that if you refi with that company, they waive the per-pay penalty, or if you sell the property, they will waive the penalty. With a hard prepay...there are NO exceptions for any reason. You refi or sell during the set timeframe and you will pay the penalty.

Most ppp's are 6-months interest, or something close to that. The pre-pay penalty is there for the investors. Since most loans are packaged and sold within 30-90 days, the investors of these loans are looking for X amount of return of a period of time. If the loan is refi'd or the property sold, the investor is no longer getting paid. So therefore, when somebody refi's etc, the penalty helps make the investor whole. I know that is a rough explanation...but I hope it makes sense.

2. Here is a quick list of mortgage terms and what they mean:

- ARM - adjustable rate mortgage

- 2/28 - that is an ARM that is fixed for 2 years, then adjusts for 28 years. These are sold to "get people in" with the hope of refi'ing them again in 2 years (or less). This term is usually used with "subprime" and alt-a lending.

- 3/27 5/25 - same as the 2/28 just the "fixed" period is for a longer period of time.

- 3/1 5/1 7/1 10/1 ARMS. These are the tradional ways A-paper talks about their ARM products. The first number being the length of time the rate is fixed for.

- I/O - interest only

- SFR - single family residence. Detatched...not a condo or townhome.

- "option - arm" - these loans have 4 (usually) payment options each month. I will make a whole post after this regarding these loans.

- FICO scores - the industry standard for measuring a bwrs credit risk. there are 3 credit bureaus (equifax, transunion, experian) which are the industry standards. Scores range from approx 300-850. 700+ is generally referred to as A-paper.

I think that is about it for now....I can add more as people request them.

Some REAL examples of F@CKED Borrowers

DISCLAIMER: these are actual scenarios that I have seen while pricing out loans. I will only provide the basic data used to price a loan (fico, loan amount, doc type, ltv, etc). I will not post, nor do I have the personal info for these bwrs. That information only becomes available when submitting a loan...and trust me...these loans are far from being submitted.

So here goes:

- Bwr bought a condo about a year ago for 350k. did a Stated loan to 100%. Bwr needs "payment relief" (I love the way people say that...like they have a headache or something). The broker had not done a comp check yet...but either way, if they could not afford the rates they had, there is NO way they could afford them now. Not to mention the 10k pre-pay penalty (approx) and whatever the broker/title/escrow fees would have been. Just AFB!!!

- bwr NEEDS to refi and pull some cash out. They need a stated loan to 90% ltv. OK, not pretty, but I can get it done. But wait! there is a kicker......there were a "couple" (actually more like several) 60 day mortgage lates in the past 12 months. And that fico score...well it fell below 540. Sorry buddy...lots of lenders will make that loan at lower LTV's (that way, when they take your house, they don't lose any money), but at 90%...no way! Just AFB!!!

- I could go on...but I think you get the point right now.