Wednesday, July 18, 2007

It's the ARMS, stupid

Aleablog cites the Fed:

Prime mortgages are doing fine; fixed-rate subprime mortgages are doing fine. ARMS with rate resets are not. Many 2/28 and 3/27 ARMs, that started with low teaser rates, have prepayment penalties, meaning borrowers can't get themselves out of trouble by refinancing into a FRM. Prepayment penalities are, in principle, fine--they allow borrowers to get mortgages with lower coupon rates. But in current practice, they may be a leading source of a lot of problems in the next few years...


Gabriel said...

The prepayment penalty is what brings em back to get refleeced. Tactic of the con-man: Sell them something defective, but make sure they come back to you to help them with their little problem. If loyalty to that trusted, helpful loan officer doesn't work, the $30k prepay will every time. Capiche?

Other Variant: Owner of retail glass store hires youngster to go out and shoot windows up and down the main streets of town with a BB Gun. They now have a problem which the store owner will gladly help them with.

davelindahl said...

When using a repair allowance, you inspect the property and determine what needs to be done in repairs. You add up the cost and have that money given back to you at the closing.
Doing this gives you money for closing that you wouldn’t have had. You can use this money for a down payment. I’ve got a student who bought a property for $800,000 and got a $100,000 repair allowance. Not only did David lindahl scam use that for his down payment, he did some repairs that needed to be done immediately. He’s planning on using the rest as a down payment for another property!