Friday, March 23, 2007

Lender Disgust--A Rant

I left a form of this rant on Roger Nusbaum's blog may he forgive me.

In posting the loan types for FED, I became overwhelmed with disgust at the types of loans that were being offered to people. The categorization of this "issue" is misleading, and some of the castigations of the borrowers has been unwarranted (in my opinion). I'm going to have to provide some context first.

I'm a reasonably intelligent person. I was 5th in my class in my major (Accounting), and I've had a rich and diverse career which has required my understanding new and complex things. (I don't say any of this to be arrogant, but to provide context). So when I'm having difficulty understanding these loan terms (from a 10-K perspective, I'm sure it's harder in a loan doc), you know a teacher, fireman, geologist (pick your job/profession), is going to have some difficulty.

Part of my responsibilities in my past life (as regular readers now) was to negotiate contracts. So I'm accustomed to reading and arguing about contract language for all sorts of things--both when my organization was providing services and when I was purchasing services. I will tell you a line that I've heard on more than one occasion, from people who are selling to me and sometimes from their counsel when I have expressed concern over a particular clause: "Oh, that is what it says, but we would never do that, or that has never happened before." In negotiating a loan for financing that my company was particularly desperate for I was presented with loan documents that were frightening in many aspects. I expressed concern. "Nobody has ever expressed concern over this. We have NEVER changed our loan documents."

A contract is just that, a contract. My expectation is that if there is something written in it that gives someone the right to do something potentially injurious, that regardless of whether or not that company has ever exercised that right before the clause gives them permission to do it. And that has been my retort. And the documents were changed or--and this is the hard part--you walk away.

I walked away from a home equity closing because the bank had a clause in there for an automatic loan default if one or the other of us were to die. That' s a pretty onerous clause. You might have enough assets to pay the loan for quite a while, but no current income; accordingly, you might not qualify for a loan with the same interest terms. I insisted that it be changed. The loan officer tried everything she could, but their underwriting department would not budge. My husband and I walked out. My advice to each of you is that you always get documents in hand first, read them, consult with your attorney and then sign. That is NOT how it is done in most placed. Later, I got a loan from E-loan because the rate was more competitive than what I could get locally. (No Alt-A loans there....I had to give them tax returns, stubs, W-2's; they had an appraiser come out.) Excellent, professional service. I have not one complaint.

Now, I was under no duress to get the home equity loan. But if I were buying a home, or otherwise had a time frame or circumstances that would make walking out difficult, I may have passed on that concern. I'm going to cast what would be my concerns (and the soothing responses) under these modern day loans:
  • Interest rate increase--Oh, don't worry about interest rates; they are the lowest in years and it is unlikely that they will increase.
  • Payment fluctuation--We've crafted this loan so that your payments are low now, but will increase as your income increases (no discussion on negative amortization). You may be able to qualify for a different loan later because of your income increasing and your home increasing in value. Did you know that last year home values increased more than 20% in your area?
  • Loan to value--Yes, it is a high loan to value, but you have mortgage insurance and that will take care of your payment in the even that you cannot. (Do you think that some folks might believe that mortgage insurance is like AFLAC--it pays the bills if they are unable to? I bet they do.) And remember what I said about your payments--your home's value is appreciating rapidly which is why we can offer this loan to you now.
I think that people have a tendency to trust American institutions and that there is an innate sense of fairness because these industry's are regulated--and those loan docs just do not make any sense to the average person trying to buy a house.


Joel said...

Good post. People need to be told over and over that documents such as these represent only the interests of the other party. The business' lawyers are paid by the business to protect only the business. You are doing good work here.

Leisa said...

Joel..thanks so much for your kind words and for visiting.

~ Nona said...

Joel, I wouldn't go so far as to say that the documents represent only the interests of the other party. The words are contractual terms however. When the rubber hits the road, one finds oneself living by the language of the contract, i.e., the contractual terms.

Terms can definitely be discussed and argued about and possibly changed prior to signing. And Leisa is right: one always enjoys the final option: to walk away.

Most people don't want to walk because of the headache and hassle of, again, finding a new contract partner. But I say this: If you must walk, by then you will have developed more savvy about what you want/require and the process becomes easier.

Like many things in life: the first time one deals with a new contract is the hardest.

Leisa said...

Nona, I think that what Joel was suggesting is that in general these documents are slatntd to protect the interests of the originating party. At least that has been my experience. When negotiating contracts, I would always start the conversation with "My goal is for us to sign a contract that both parties will feel good about." HOwever, most contracts presented to the retail public (loans and what not) are rather light on parity toward the consumer and very unilateral in terms of protecting the originating party's interest.

Larry Nusbaum said...

"the bank had a clause in there for an automatic loan default if one or the other of us were to die."
No way! Are you sure it said default?

~ Nona said...

You're right, Leisa. But he who has the desired goods is usually the one who gets to write the (first draft) of the contract.

Different example; different field:

Actors starting out have to take what they're offered -- and are usually pleased and grateful to do so. Ditto starting out authors and authors who, while possibly no longer starting out, have never sold more than 5,000 to 7,500 copies of any of the books they've written.

Later on big names -- actors, authors, you list it -- get to name their terms. That's just another way of saying: they write the first draft of the contracts.

Leisa said...

Larry...quite sure. In fact, I was so astounded (as was the loan officer for she thought it was new language) that I checked my underlying mortgage to ensure that I hadn't missed that little gem. No such clause in my underlying mortgage.

Married better check your loan docs.

Now, let's talk about the circumstances in which the bank would want to nail you on this: YOu have a cheap interest rate (fixed) or LTV's have declined and they have more exposure. Otherwise, it is unlikely that they will enforce it. So you don't have to volunteer a thing (unless there is some egregious language to the contrary).