Mortgage Lending

Did you get your copy of USA Today today? I know Heather Barr did!

Not many people get featured as an expert in the mainstream media, let alone a national publication like USA Today. That’s a huge compliment to Heather, and to The Butterworth Group and Thompson’s Realty as well. You get enough high-quality people all working together, and others take notice!

Congratulations, Heather – great job!

And the article itself? It’s about how the changes in the lending industry over the last few months are affecting home buyers and home sellers. Here’s a link to the article, and here’s a link to view it as a pdf (in case USA Today decides to de-activate their link.)

Your knows a good team when he works with one Realtor,

Chris Butterworth

AZCentral.com published a story yesterday titled “Wachovia quits offering risky mortgage loans.”

I almost feel bad picking up this story, as if banks haven’t had enough bad press, and I’m simply piling on. Then I think “are you kidding me?”, so I’ll keep writing.

Here are the basics:

There is one type of mortgage out there which has as much to do with our current real estate woes as any other single item: the Pick A Payment Loan. In almost every situation, when people write/talk about loans resetting their interest rate, and borrowers unsure about how much they owed/borrowed - this is the loan they’re referring to.

Lenders made these loans, and each month the borrower received a statement in the mail, with the option to Pick A Payment. The borrower could mail a check in one of 4 different amounts:

15-Year Amortization: Send in this amount, and your loan will be fully paid off on a 15-year time table.

30-Year Amortization: Send in this amount, and your loan will be fully paid off on a 30-year time table.

Interest Only: Send in this amount, and you will be making an interest-only payment, with no reduction in principal.

Minimum Payment: Send in this amount, which is less than the interest rate, and the difference will be added to your mortgage balance to be paid back later.

Guess which payment most people made…

Then, after a certain amount of time, the interest rate adjusts upward, and in most cases the minimum payment option is no longer offered. This is when the borrowers realize they cannot afford their home, the home is now worth significantly less than their mortgage balance, and another bank-owned listing is not too far away.

On top of all that, the banks who made these loans consistently lowered the credit & equity requirements, and made them available to investors with little or no money down.

So now, almost 3 years after the market’s peak, and about 2 years after the common sense realization that the market was going to get a lot worse, Wachovia has decided that these aren’t very good loans.

Kudos to you, Wachovia. No one’s going to pull the wool over your eyes…

Your still bearish on banks Realtor,

Chris Butterworth

Technorati Tags: Wachovia, pick a payment

Last year, as the market slowed to a crawl, and everybody began to realize just how bad things were, the finger pointing started.. Banks were making loans to people who couldn’t afford to repay them. Borrowers were lying on their loan application. Mortgage Brokers were helping borrowers lie, or were having borrowers apply for loans with artificially low start rates. Realtors were encouraging buyers to buy more expensive homes. Appraisers were justifying rapidly rising prices. The Media was fueling the price frenzy.

Everybody can share in the blame to some degree. Here’s my list of blame, in order from least to most at fault.

The Media. Of course they fed the frenzy – these are the same people who devote 15 minutes of a half-hour broadcast to … rain. I can’t wait for the Monsoon ‘08 series next month.

Appraisers. The appraisers who committed outright fraud should be punished. But the vast majority were really trying to capture the market value – what the buyer and the seller agreed to.

Realtors. Those who encouraged buyers to use “pick a payment” type loans in order to buy a more expensive home than they could afford were either ignorant or negligent.

Mortgage Brokers. Same argument as the Realtors, except they can’t claim ignorant. The loan officers who knowingly put borrowers into loans that would adjust upward and become unaffordable shouldn’t have a clear conscience today.

Borrowers. Ever heard of buyer beware? You’re taking out a multi-hundred thousand dollar loan; don’t tell me you didn’t understand the terms. At the end of the day, you’re responsible for your own actions.

Banks (and Mortgage Lending Companies). When you lend money, you’re number one rule is to not lose money. When you lend money professionally, you’re at a big advantage, because you have systems in place to make sure every borrower has the desire & ability to repay you, and the collateral in case they don’t.

For years banks made loans based on low collateral, or bad credit, or without verifying income. But they always relied heavily on the other two in these cases. No collateral – the borrower better have good income and great credit. No Income – look for a borrower with great credit and some equity in the property. Bad credit – need good income and good equity. Oh, and they’ll add a higher interest rate to the loan in all three of these cases.

Suddenly, in 2004 and 2005, banks stopped caring about these qualities. No down payment, no income, no credit – NO PROBLEM! Then they went even further by creating and advertising the low teaser rate loans: “Buy a home today with a $500,000 loan, and your payment can be as low as $200 per month.” Are you kidding me?

Remember the old Golden Rule – “He who has the gold makes the rules.” The banks had the money; they were the ones making these loans. They might claim they were lied to, and even defrauded. But if you don’t bother checking anything before you make a loan, that’s what you get. Just like the borrowers, you’re ultimately responsible for your own actions.

As a side note, I might have a different opinion if the banks took strong action early in the process. They had every opportunity to be proactive and make radical solutions which would benefit everybody. (I even offered an idea for renegotiating mortgages.) But they didn’t. They’ve handled the entire process by sticking their head in the ground, or by running around like the Keystone Cops. My short sale example from yesterday highlights this point.

Your wouldn’t trust the banks with his money if it wasn’t FDIC insured Realtor,

Chris Butterworth

Technorati Tags: real estate bubble, mortgage lending

Is the market really that bad? Are mortgage companies (and real estate companies) really going out of business?

Check out The Mortgage Lender Implode-O-Meter.

I’m not here to spout doom & gloom, but I’m not wearing my rose-colored glasses either. I’m not even going to offer an opinion on the marketplace (at least, not in this post! ;p )

But the fact that there’s a web site dedicated to tracking the major lenders who have imploded (250 and counting so far) is a pretty remarkable fact…

Your looking for his happy place Realtor,

Chris Butterworth

Technorati Tags: mortgage lending

I spoke with someone who had recently gone through a rough time. It was a temporary situation, but it left him behind on his mortgage, and the bank was threatening foreclosure. He had been laid off from his corporate job, and it took about 9 months to find a similar-paying job with another company.

During the 9 months without work, he had used his available savings, and was 3 months behind on his $1,800 monthly mortgage payment. The outstanding balance on the mortgage was approximately the same as the current value of the home. He was now able to make the $1,800 monthly payment, but could not come up with the $6,000 (approx.) the bank was demanding to bring the mortgage current.

We discussed the option of selling the home, and decided a short sale would most likely be required – this was because after all closing costs and commissions were paid, there wouldn’t be enough proceeds left to pay off the mortgage. The good news was that we would be close, and the bank would most likely approve it. The bad news was that his credit would be impacted, we were on a very tight time schedule, and that he didn’t really want to move if he could avoid it.

He was also getting himself into the mental state of being ok with losing his house – he mentioned the bright side that his exact floor-plan a block away was available for rent for $1,200 per month. Maybe he would even end up saving money out of the deal…?

In the end, we (he) discussed the situation in great detail with the bank. He was able to, and wanted to, continue making the monthly mortgage payments. But there was no way possible of coming up with the extra $6,000 to bring the loan current.

The bank agreed to add the $6,000 in past due payments and fees to the balance of the loan, and then to reset the payment schedule so that his next $1,800 payment would be accepted, and he would have to make 3 or 4 extra payments on the back end of the loan (if he kept the loan for 26 more years.)

In the end, common sense prevailed, and both the homeowner and the bank came out ahead.

Your happy when things work out Realtor,

Chris Butterworth

Technorati Tags: past due loan, renegotiating a mortgage

Poof. Just like that.

Most lenders have labeled Maricopa County as a “declining market” over the last few months, and had reduced their allowable loan-to-value ratios accordingly – generally by 5%. This means that lenders who would normally make a mortgage loan to a buyer at 100% of the purchase price were now reducing that to 95% of the purchase price, requiring 5% as a down payment.

Last week Wells Fargo Home Mortgage followed suit, and pulled their 100% loan program from the Maricopa County market. Yesterday, U.S Bank did the same, effectively eliminating 100% financing completely.

If any lenders out there know of another option, please share in the comments below!

My guess is that these loans will come back, but not anytime soon. The banks will wait for both our real estate market, and the mortgage environment in general, to stabilize first. When these loans do come back, I expect the underwriters to be extremely cautious with their decision-making.

In the meantime, this might make FHA loans the best game in town. (and we happen to know an FHA specialist…)

Your sad to see them go Realtor,

Chris Butterworth

Technorati Tags: mortgage, FHA

Mortgage underwriters have been restricting their guidelines over the last several months, making it harder for many buyers to qualify for their mortgage. This, of course, brings out the “creative” side in people - buyers, sellers, realtors, and lenders - all looking for a way to maximize their effectiveness within the new set of rules.

Yesterday I heard about a new system that I think crosses the line between creative and shenanigan. Here’s an overview. (it can be a little hard to follow, so bear with me…)

Mr. Buyer goes to work for a membership-selling company, getting paid a fat commission for every membership he sells. Mr. Buyer then sells a membership to Mr. Seller. The membership will provide discounts to certain home-furnishing stores. Mr. Seller pays upwards of 6% of the sales price of his house for this membership. 1% of the fee is kept by the membership-providing company; the remaining 5% is paid out to Mr. Buyer in the form of a commission – a fully legal commission which will require a 1099 at the end of the year. Mr. Buyer then uses this 5% of new-found, “legitimate” money as the source of his down payment for Mr. Seller’s house. The rest of the contractual terms, including any closing cost assistance provided by Mr. Seller, would be unaffected by this arrangement.

This seems perfectly legitimate on the surface. But now let’s ask some tougher questions. (I’m going to assume a $350,000 sales price for this example.)

Is it realistic to believe that anyone would pay $21,000 for a discount-type membership? I’m pretty sure my Costco membership is less than $100.

Isn’t there a massive conflict of interest, or other stronger term, that the Seller is buying a $21,000 membership from the Buyer, which might be the only way the Buyer can afford to buy the house the Seller otherwise can’t sell?

If this is a legitimate company, selling legitimate memberships, and paying legitimate commissions, how many employees/contractors sell more than one membership?

How many legitimate companies are there where you can earn a $21,000 commission within a month of starting your new job?

If this arrangement is purely to expedite the sale of a house, doesn’t it create an artificially high sales price? The Seller would net the same amount by lowering his sales price $21,000. And isn’t an artificially high sales price, not disclosed to the lender, considered loan fraud?

In my opinion, this is another one of those “ideas” which is deep into the gray area – probably a dark charcoal. I’ve said it before, but if it looks like a duck and it walks like a duck…

ps – I’m not a professional astrologer, but let me peer into the future… I see lawsuits. lots of lawsuits. coming from Mr. Buyers. very upset that they received 1099s for a mysterious $21,000, when all they wanted to do was buy a house. Mr. Loan Officer, and Mr. Realtor, you’ve got some ’splainin to do..

Your sitting this one out Realtor,

Chris Butterworth

Technorati Tags: mortgage fraud

It’s been stated and re-stated all week long that the Fed made an inter-meeting rate cut due to falling equity prices in the global markets. My guess was that there was more to the story, but I didn’t really have the time or the resources to find out. Instead I looked forward to John Mauldin’s weekly e-newsletter (click here to subscribe), knowing this was a big enough story that he would dig into it in greater detail. And he did not disappoint!

John offered 2 opinions that I had not yet heard; one of many of his colleagues, and then his own differing opinion:

1. Fed’s Folly – Fooled by Flawed Futures

It seems that a rogue trader lost Societe Generale $2.2 Billion over the last few weeks before management found out. Once the European bank started making trades to cover their losses, they caused an over-supply in the marketplace (eventually accounting for over 10% of all trades), which caused prices to move away from them. They ended up losing over $7 Billion in a very short time frame.

Many insiders believe that the European Central Bank knew what was going on, but that our own Fed either did not know or wanted to make a bold statement. Either way, it’s possible that this move will end up looking very foolish, and the Fed will have egg on its face for decades to come.

2. The Start of Something Bigger

Mr. Mauldin believes that there is a deeper underlying problem (worse than the sub-prime mortgage mess) which has yet to unravel. The Fed is trying to set the stage for the carnage we’ll see over the next few months. I’m quoting various parts of his newsletter below (emphasis mine):

“I believe the monoline insurance companies like Ambac and MBIA are in worse shape than most realize, the counter-party risk in the $45 trillion Credit Default Swap market is much worse than we realize, and the exposure by various banks to their problems is much larger than currently understood. The Fed understands this, and realizes that they have been behind the curve but need to catch up.”

“If you are a bank or regulated entity, and you have mortgage-backed securities that have been written by a AAA monocline company, you can carry that debt on your books as AAA. But as the companies get downgraded, you have to write down the potential loss.”

“No one is really sure who owes what and to whom, and what is the risk that there may be no one to pay that CDS when it comes due? The entire mess is going to have to be unwound in the coming quarters. it may take a year or more.”

“Think this through. MBIA is still rated AAA. Ratings downgrades are just a matter of time. Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers, according to analysts at Barclays Capital. ”

“I think the concern that there is the potential for a much worse credit crisis than we are currently experiencing is what is driving the Fed. They are looking at the problem from the inside, and realize that they simply have to engineer a much steeper yield curve to allow the banks to make enough profits so that they might be able to grow their way out of the crisis over time.

If I am wrong and the Fed was responding to the stock market, then we will likely not see a cut this next week. But if we get another 50-basis-point cut, as I think we will, then it means the Fed is responding to concerns about the credit crisis. And we will get another cut the next meeting and the next until we get down to 2% or below.

A 50-basis-point cut takes the rate to 3%. It they had cut the rate by 1.25% next week, the market would have collapsed. Better to do it in two leaps is what I think they are thinking. We will see.”

3. My own opinion?

I’m not going to bet against John Mauldin, but we’ll know more after the Fed’s next meeting. If John is right, then we’re going to be looking at an extended period of very low interest rates.

Banks will have a big appetite for making new loans, especially if they’re getting money at 2-3% and lending it out at 6%. They won’t get over zealous, like they did a few years ago, and give loans to those who can’t make payments. But they will want to make loans to anyone who is capable of making the mortgage payments – they’re going to need as much income as possible to cover their losses.

We should be seeing a decrease in the number of ARMs resetting each month, which means we should be seeing a decrease in the number of new, bank-owned properties hitting the market. If the inventory of homes for sale levels off (which it should), and people continue to move to Arizona (which they will), and banks want to make new loans (which they should), then we should see a change in our local market over the coming quarters.

Your looking forward to the change Realtor,

Chris Butterworth

Copyright compliance: John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

Technorati Tags: John Mauldin, Societe Generale, Fed, rate cut, Fletcher Heights,

I’ve written about these products before, and have had fairly large responses each time.

Mortgage Accelerator – Paying off Early (3/20/07)

Mortgage Accelerator – Upon Further Review (4/10/07)

Mortgage Accelerator under fire – Australian Securities and Investments Commission taking action against mortgage brokers (8/28/07)

Lately I have received a lot of emails from loan officers who sell these products. Most of them accuse me of not understanding their product. Most of them have not read what I’ve already written in detail. And all of them offer to let me watch a video or read their company’s brochures about the product. That’s just not something I’m interested in doing, over and over again.

So, I’m going to re-state my thoughts on this type of mortgage, and let anyone who’s interested make comments below.

Here are my 7 points of contention:

#1. It Works. There’s no doubt in my mind that if somebody follows the MMA program, and deposits all their excess/discretionary income against their mortgage, they will pay their mortgage off significantly faster.  That has never been an argument from the very first time I posted about this product.

#1A. Bi-Weekly Mortgage Payments. Another mortgage option that’s been around for years is the bi-weekly payment system, where borrowers make 26 payments per year, with each one being 50% of a full mortgage payment. The result is equal to making 1 full extra payment per year, which will shave about 6 years off a standard 30 year, fixed rate mortgage. I’m not saying one is better than another; I’m simply saying that if you put more money toward your mortgage, you’ll pay it off sooner.

#2. You must go All In. For this program to work REALLY WELL, virtually ALL excess/discretionary income must be used.  This means extra expenses like kids’ braces, cars, vacations, investments, or loss of income, will work against the program (meaning your mortgage will NOT be paid off as quickly.)  The more you have extra expenses, or use your money for other things, the longer it will take to pay off your mortgage.

#3. MMA Not Necessary to pay off early. This (points #1 and #2 above) is also true WITHOUT the MMA.  Anyone who puts all their excess/discretionary income against their mortgage will pay it off very quickly.  Anyone who spends their money elsewhere will take longer to pay off their mortgage.

#4. You can’t have your cake and eat it, too. One of the most common arguments I hear is that this product gives you flexibility; if you need access to your money you’ll have it. That’s not fair; You can’t argue that a person still has access to their cash on one hand, and that they’ll pay off their mortgage faster on the other.  If they use their money for other things, they delay the ultimate payoff of their mortgage.  A standard mortgage with a standard HELOC offers the exact same flexibility.  It might take a lot of planning & discipline, and you won’t have software telling you exactly how much each decision affects your overall total, but the same (or very similar) results COULD be achieved without the MMA product.

#4A. Traditional Mortgages offer the same “cake”. Put 20% down on your home, and then get a HELOC after you move in.  Pay down your mortgage with every last dollar you can (discretionary income), but then use your HELOC whenever you have extra expenses.  Then use your discretionary income to pay your HELOC back down to zero, and then start paying extra to your mortgage again.  Same concept, same results, but with traditional programs. No extra expenses, no extra software.

#5. False or misleading Advertising. The advertising claims that you will pay off your mortgage in half the time without changing your spending habits or making any extra payments are hogwash.  If someone is not going to change their spending habits at all, then by definition they would currently be putting ALL their excess/discretionary income into their checking account, today, before they started using this program.  Otherwise they will need to make some sort of change.  Show me one person with a $200k mortgage and over $100k in their checking account, and I’ll agree that that person will be able to take advantage of this program without changing any of their habits..  The fact is that very few people will achieve the results that are being advertised on the radio or in other media.

#6. No Fixed Rate Mortgages allowed. This program forces people to use an adjustable rate mortgage.  That would have been fine over the last 15 years, while rates were declining &/or stable. But how can you guaranty rates will remain low over the next 15 years?  How well would this program work if rates were sitting at 11% in 2011?  That’s why I still love fixed rate mortgages - people can pay down principal without any penalty, but they don’t have to.  And the banks take the interest rate risk, not my buyer.  If interest rates go up, and my buyer is sitting in a FRM at 5.75%, the math/analysis actually tips against this MMA program.

#7.
The Australian Securities and Exchange Commission agrees with me – not that the program doesn’t work, but that the advertising claims are false.

Loan Officers – here’s your chance. If I’m wrong, I want to know about it. Please pick these points apart. Let me know what I’m missing. All comments which add value or insightful discussion will be approved. (please let me know which point you’re addressing in your comment.) Comments merely stating the program works (we already know that), pointing me to your company’s webinar or other promotional material (advertising), or simply stating you offer these services (self promotion), will not be approved.

Borrowers – if you’ve been considering this type of mortgage product, you should get to learn quite a bit from the comments below. But Buyer Beware – no facts are being checked for accuracy. You should always do your own due diligence before making a major financial decision.

Your looking forward to this discussion Realtor,

Chris Butterworth

Technorati Tags: Money Merge Account, mortgage accelerator, mortgage options, fixed rate mortgage, Fletcher Heights

Everyone knows you can’t renegotiate your mortgage with your current bank, right? But why not?

Contracts are re-negotiated all the time, and as long as both parties consent, the new agreement replaces the old one and is legally binding. The banks have an opportunity right now to pull off an awesome public relations move, while increasing their own long-term profits and at the same time saving homeowners from losing their homes. Here’s my plan:

ARMS & Heavily Depreciated. This is available for properties which have depreciated in value significantly, and which are carrying an Adjustable Rate Mortgage. (basically, many homes that were purchased in 2005 and 2006 would qualify.)

Good History. Borrowers must have been on-time with their mortgage payments before the interest rate adjusted upward.

Find Market Value – Use a combination of Realtors and Appraisers to determine the market value, with at least one party being hired by the bank and the borrower. Average the opinions to arrive at a current market value.

Write down the mortgage. If more is owed on the home than the current value, the mortgage can be written down to that value, and the loan can be re-amortized (on fixed-rate terms) to create a lower payment. The borrower must be able to qualify for the new, lower payment. (note – in cases where there is a 1^st and a 2^nd mortgage, I would use a formula to determine how much each one gets written down. )

Credit Reporting. Build a new credit reporting entry called “Renegotiated”, so that borrowers’ credit scores (their predictive ability and willingness to repay debt) is addressed appropriately.

This does not give the borrower an easy “out”, since selling the home will still cost an additional 5-7% and require them to pay out of pocket in order to complete a sale. It also has an adverse effect on the borrower’s credit report.

This does, however, remove both of the major contributors to foreclosure – people are most likely to walk away from their home when the payments are too high AND there is negative equity in the property. The banks will lose a few dollars quickly, but will end up with a happy, long-term borrower who can afford the mortgage. This should beat the alternative of getting the property back, usually in less-than-desirable condition, and trying to re-sell it in a declining, ultra-competitive market.

Your looking for solutions Realtor,

Chris Butterworth

Technorati Tags: ARMs, Adjustable Rate Mortgage, renegotiating mortgage, foreclosure, Fletcher Heights

With the popularity of Adjustable Rate Mortgages (ARM’s) during the 2004-2005 real estate boom, many homeowners are now facing the possibility of have their mortgage payments increase substantially.  Mostly these are the homeowners who were counting on the values of real estate to continue the upward trend and had planned to refinance before the reset would take place.  However, with the softening of the real estate market, many times the homeowners now owe more than the home is worth, thus making a refinance all but impossible.  And to make matters worse, many don’t know how it is that their interest rate is calculated.  They undoubtedly are expecting it to go up, but because they have no idea of what it is going to be, they have a difficult time preparing for it.  If you are in this situation, this will help you get a better idea of what to expect when your interest rate resets.

There is no way to know exactly what your Adjustable Rate Mortgage Interest Rate is going to be on the day it is scheduled to reset, but it is possible to calculate what it would be if it were to reset today.  Because your interest rate is tied to an index that fluctuates you won’t know what it’s going to be until that specific day.  But being able to calculate it today can only help you get yourself prepared.  To figure it out, you’ll need four things.  The first item you’ll need is the interest rate index to which your ARM interest rate is tied.  These will have a name like LIBOR, COFI, Prime Rate, CMT, CODI, or MTA.  You can then go to a website such as www.mortgage-x.com to find its most recent value.  The last I checked on 9/10/07 most of them were between 4.2% –  5.5%.  The second piece to the puzzle is the margin.  The margin is the amount added to the index to determine your interest rate.  The third thing you’ll need is the adjustment cap, which is the amount that your interest rate adjustment is limited to at each reset.  And lastly, you’ll need to know the lifetime maximum rate.  Not all ARM’s have adjustment caps, but they all have lifetime maximum rates.

The way to figure out your new interest rate is to take the index, plus the margin, subject to the adjustment cap and lifetime maximum rate.  Here are a few examples:

1.        Current rate is 5%, index is 5.5%, margin is 2%, adjustment cap is 3%, and the lifetime maximum rate is 10%.  The new interest rate for this ARM would be 7.5%.  The adjustment cap and lifetime maximum rate would not come into play in this scenario.

2.       Current rate is 4%, index is 5%, margin is 3%, adjustment cap is 3%, and the lifetime maximum rate is 10%.  The new interest rate for this ARM would be 7%.  The adjustment cap would limit the adjustment amount to 3%.  Without the adjustment cap the interest rate would reset to 8%.

3.       Current rate is 5%, index is 5%, margin is 6%, there is no adjustment cap, and the lifetime maximum rate is 10%.  The new interest rate would be 10%.  In this scenario the lifetime maximum rate would come into play.  The rate would have been 11% with a higher lifetime maximum rate.

Hopefully this will help you homeowners who are facing the possibility of an adjustable interest rate adjustment in the near future prepare for what you will see in the envelope that comes from your mortgage company.

-Steve Nicks

Technorati Tags: Phoenix real estate, Desert Ridge real estate, ARM, Margin, Index

You’ve probably heard the ads on the radio: “Pay your loan off in half the time without any extra payments or changes in your spending habits.” The mortgage accelerator-type loans out there sound too good to be true… Uh oh, that sounds familiar – how does the saying go? If it sounds too good to be true it probably IS too good to be true. Darn.

I’ve written about these loans twice before, once when I first heard about them (mortgage accelerator – paying off early) and then again after I had done some additional research (mortgage accelerator – upon further review). Both of these posts generated a lot of conversation – online and offline, with various realtors and mortgage professionals. So I know the debate can get heated. I’ve also seen others write about this topic, most recently Christoph Schweiger on his real estate blog, and the resulting comments are generally similar.

After my last post, I began an email conversation with Carolyn Bond, CEO at the Consumer Action Law Center in Melbourne, Australia. Carolyn was nice enough to summarize a very lengthy topic, and allowed me to post it on her behalf. Please read on:

I am co-CEO at the Consumer Action Law Centre in Melbourne, Australia. Our centre is a non-profit, funded by the Legal Aid Commission and the Government Consumers Affairs Office (Consumer Affairs Victoria).

I look on with great interest at the promotion of “mortgage acceleration” type programs in the US. The type I’m talking about are ones that, in one form or another, allow all income to be paid into a line-of-credit (LOC) until required. Claims tend to be made that this can cut years off your mortgage without requiring additional payments.

US promoters are correct to say that this program was sold in Australia before it was “discovered” by US borrowers. However consumer organisations such as ours, and our national financial services regulator - Australian Securities and Investments Commission (ASIC) - concluded years ago that there were no savings to be made, and that promoters were engaged in unlawful conduct. Examples and charts showing massive savings have all been shown to include significant increases in payments being made to the mortgage (in addition to the funds deposited temporarily). Any savings made by depositing regular salary into the LOC amount to possibly a few hundred dollars per year, and unless the borrower has significant funds to deposit, these savings are less than the additional interest paid on the LOC - even if the LOC is quite small (say $50,000). Borrowers who pay any money for software, monitoring or other services, are often thousands of dollars worse off.

I don’t personally know anyone who has used a LOC in this way, apart from consumers who come to our agency for assistance.

Our regulator ASIC says, on its website:

“in reality there is no magic trick or secret type of loan that will let you own your home sooner. Substantial savings are only achieved by consistently making additional payments on your mortgage. You therefore need to be very careful when brokers claim that you can own your home sooner and make substantial savings by using a line of credit mortgage facility.”

ASIC has taken action against mortgage brokers promoting this type of product, as well as companies providing calculators to consumers and brokers. This action has resulted in:

• The withdrawal of a LOC Calculator that was on over 100 websites;
  
• Changes being made to a “Simulator” Calculator
  
• Court orders (by consent) against a company promoting “mortgage reduction”, including orders that the company write to past customers advising they may have a right to claim loss or damage caused by misleading and deceptive conduct.
  The misleading and deceptive conduct included showing clients comparisons between loans arranged by the company and standard loans, that represented that by switching loans they would save money and pay off their home loan sooner but failed to adequately explain that to obtain this benefit clients would need to make extra repayments.
  Despite the action from the regulators above, there is still some promotion of this type of scheme, but much less than in the US.
  For further information, see the following links:
  

  http://www.asic.gov.au/ASIC/asic.nsf/byHeadline/07-144%20Court%20finds%20major%20mortgage%20broker%E2%80%99s%20conduct%20misleading%20and%20deceptive?opendocument
  

  http://www.asic.gov.au/fido/fido.nsf/byheadline/Line+of+credit+mortgages?openDocument
  

  (Note the example at this link).
  

  http://www.asic.gov.au/asic/asic.nsf/byheadline/04-300+No+credit+for+misleading+loan+calculators?openDocument
  

  http://www.fido.gov.au/asic/asic.nsf/byheadline/07-95%20asic%20obtains%20injunctions%20against%20loan%20calculator%20operator
  

  Carolyn Bond
  

  Consumer Action Law Centre
  

  Melbourne
  

  Australia
  

  www.consumeraction.org.au
  

  26th August 2007
  

Thanks again to Carolyn for sharing this information with us.

- Chris Butterworth