Marc's Mortgage Matter's

Last month, the United States attorney’s office in San Francisco announced dual inquiries into whether World Savings engaged in predatory lending practices or misled investors about its financial well-being. And the bank has been sued by numerous borrowers who claim they were misled into taking out mortgages they could not afford.

At the center of the controversy is an exotic but popular mortgage touted and marketed by World Savings, WAMU, and Countrywide to name a few - that helped generate billions of dollars of revenue at their banks. Known as an Option ARM, and named “Pick-A-Pay” by World Savings (and others) - it is now seen by an array of housing analysts and regulators as the Typhoid Mary of the mortgage industry.

Option Arm's allowed homeowners to make monthly mortgage payments that were so small they did not cover their interest charges. That meant the total principal owed would actually grow over time, not shrink as is normally the case. Now held by an estimated two million homeowners, the option adjustable rate mortgage will be at the forefront of a further wave of homeowner distress that could greatly delay or even derail an economic recovery, mortgage industry analysts say.

Lenders embraced practices like the use of independent brokers who used questionable methods to reel in borrowers. These and other practices, critics contend, undermined the conservative lending practices that the banks let go off - in the years leading up to the present crisis.

“This product was the most destructive financial weapon ever deployed against the American middle class,” said William J. Purdy III, a housing lawyer in California who is representing elderly World Savings customers struggling to repay their loans. “People who have this loan are now trapped, and they can’t get another loan.”

Many lenders also used pre-payment penalties to lock borrowers into “absolutely awful” loans. “You have to understand how independent brokers work,” one insider states. “They are the whores of the world.” I don’t think anyone thought a Pick-A-Pay product was a customer friendly product, says a former Wachovia executive who requested anonymity to preserve professional relationships. “It was easy to mislead them.” When you get people whose mortgage payments are taking half of their cash flow, well over half if the loan reverts to a normal term fixed mortgage - they are in over their heads, and these loans should not have never been sold to this customer base.

Over all, analysts expect the option ARM fallout to be brutal. Fitch Ratings, a leading credit rating agency, recently reported that payments on nearly half of the $200 billion worth of option ARMs it tracks will jump 63 percent in the next two years — causing mortgage delinquencies to rise sharply.

“As the largest and most respected regulated institution providing option ARMs, I hold the these lenders responsible because a large percentage of home borrowers — but not all — should have been advised that it was in their best interest to have a fixed-rate mortgage,” said Robert Gnaizda, general counsel for the Greenlining Institute, a homeowner advocacy group. “I believe that financial institutions have a quasi-fiduciary responsibility not to mislead the borrower.” Good luck with that one Bob.

 



Happy Holidays to one and all!