Tuesday, October 17, 2006

"Toxic" Mortgages -- The Next Refi Boom

It's everywhere. The magazines are running cover stories, the news is full of reports, the powers that be are holding hearings. Consumers are shaking in their boots. They will want to refi before their monthly adjustable ARM eats their house like on the cover of Business Week.

Now the mortgage originators are ready to refi these mortgages into fixed rate mortgages. The borrowers will be safe..or will they?

What were the motivators for accepting the payment option ARM in the first place? Some may have been seduced into it by their Loan Officer (yeah I said it). Some may have tried to buy more than they could afford with a fixed rate mortgage. Some borrowers may have thought that we weren't going to live in the property this long- that it was a prime flip. Some may have been thinking about freeing up capital to put into another investment.

It's not a no-brainer to immediately think that this is the next refi market. It's necessary to know what the initial motivation was when the borrowers purchased the property. I didn't originate many of these mortgages, maybe 2 or 3 out of a few hundred mortgages in the last few years, so I can't just immediately assume that these are all refi fodder. Also do these borrowers now owe more against their home than they initially borrowed? What is the prepayment penalty? One reason why I stayed away from these pay option ARMs was the steep prepayment penalty would have prevented the borrower from refinancing their mortgage down the road should rates drop. That would have prevented my doing another loan with them, bad for business in my opinion.

These borrowers are going to be hard to refinance. They may not qualify for a fixed rate mortgage that will increase their payments, most pay the minimum payment option resulting in negative amortization. The higher payment even if only interest only is going to be much more than they are used to paying each month. I think that we as Mortgage Brokers need to spend a little extra time, work with the borrowers to find the best solution and provide more education about what a mortgage entails and the responsibilities inherent in borrowing mortgage money.

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