Who Can You Trust With Your Home Loan

Category: Finance, Mortgages.

Who can you trust with your home loan? So much has happened to home owners in the past two years this may be a good time for some strategic reflection.

When you consider the financial and social impact of purchasing a home, that's a great question. The reports about nationwide foreclosure are just astounding. Bankruptcies are now being pursued at the prime lender level. According to RealtyTrac. com, foreclosure activity is up over 55% in the first half of 2007! According to the Inman News service, American Home Mortgage Investment Corporation, a publicly traded real estate investment trust, and the nation's 10th- biggest residential mortgage lender, has filed for Chapter 11 bankruptcy protection. More financial dominoes are poised to fall as the one trillion dollars in Adjustable Rate Mortgage's( ARMs) are set to adjust in each of the next two years. Estimates suggest more than sixty subprime lenders have either sought bankruptcy protection or suspended lending operations.

What we are witnessing is the" cause and effect" of selfishness and greed in the mortgage lending community. For many lenders the desire for commissions, or profits, fees, whichever is most appropriate, simply overtook their better judgment. Instead of following sound business practices that protect the borrower and the lender with appropriate underwriting, the desire for more profits has thrown things out of balance. Their actions have created a" crisis of conscience" in the lending community. The creation of products like" Stated income loans" , "Adjustable Rate Mortgages" , "Interest Only Loans" , and" Negative Amortizing Loans" demonstrate a certain degree of creativity. Think about it.

However, in the hands of financially inexperienced borrowers, the improper use of these tools has resulted in financial disaster for too many home owners. To make matters worse, many of the loan contracts contained pre- payment penalties. As a matter of fact, it became too common for many lenders to actually encourage borrowers to apply for home loans they had very little chance of ever repaying. These penalties would have to be paid even if the borrower wanted to get out of the contract and into something more suitable. Since the loans were created and then sold to Wall Street as mortgage backed securities, the rest of the dominoes have not yet fallen. This is a major part of the" crisis of conscience" I refer to. You see these securities are part of pension funds, mutual fund families, hedge funds, Real Estate Investment Trusts( REITs) , and similar investments.

For many investors the results will be not only disappointing, but devastating. The results of these activities become real once the write downs and write offs have been completed. Here's another hit by the sub- prime market's collapse. The investment firm's High- Grade Structured Credit Strategies Enhanced Leverage Fund, as of April 30th, was down a whopping 23% for the year! Investors in a 10- month- old Bear Stearns( BSC) hedge fund are learning the hard way about the danger of investing in risky bonds with borrowed money. This is a preview of things to come.

Let's not forget about the conscience of the borrowers. Based on what has just happened, is it just me or is there something really wrong with the name of that fund? They are not without blame. Better buying decisions must be made that are based on deductive reasoning as well as emotion. A home loan for many people is the largest investment they will ever make. Professional help with contract reviews would also be very helpful.

He was a Vietnam war veteran. My barber gets credit for sharing a very simple but potent example of what should happen between a financial counselor and a borrower. After the war he decided to take advantage of the VA Bill that allowed him to get a 100% home loan in return for his service to this country. Just use your imagination to get an idea about what a dream home looks like. He and his wife finally found what they were sure was to be their" dream home" . When they met with the VA counselor to discuss buying this home, things became much more realistic.

Consequently it made a lot more sense to find a home that could be purchased with his income, not their combined incomes. For example, my barber was advised that only he was a war veteran, so only he was eligible for the special home loan funding. Further, when he reviewed the financial data the counselor asked if the couple intended to have any food in the house. Of course you can see how this was developing. In addition, if there was to be food, how would it be prepared? Once you add in the other utilities and the taxes and insurance, what you thought was to be your mortgage payment falls way short of your actual mortgage expense. In this land of opportunity there should also be a comprehensive investment plan.

As a home owner you should also put some money away for emergencies and the so- called" rainy day" . This counselor did exactly what needed to be done to prevent the very problems that are so prevalent today. Just do the right thing for the borrower and the lender when creating a home loan. His actions demonstrated the best way to overcome a" crisis of conscience" . In a win- win situation, there are no losers. Copyright 2007/ TDO Properties, LLC/ All Rights Reserved