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.