Adjustable Rate Horror: Payments Go Up While House Goes Down

This piece is taken from my files. The names again were changed to protect this couple but the story is true and a real example of how professionals in the mortgage and real estate industry are looking out for themselves and not for their clients. This does not apply to all of these people, but for the last 5-7 years their has been an influx of untrained, money chasing people into both of these professions. As a consumer you should do your homework and meet personally with the people who will be helping you with the largest transaction of your life. Ask for and contact referrals for all financial counselors that you will ever speak with.

David and Cheryl Taylor worked hard to overcome a bankruptcy caused by David's first marriage. In 2001 with a spouse who wanted to leave, 4 children and more in payments than he made in two months, David took his children moved out of a two bedroom apartment and into his parent's home. After 9 months of working hard he filed bankruptcy and began to remake his life.

The sub prime market was waiting to swallow him up. David met Cheryl at his mother's home 5 months after his divorce was final and after dating for two years they decided to marry. Now with 5 children and another on the way we fast forward to August 2005. Together they decided to try and buy a home. With less than $1000 for a down payment and with $800 available to make a house payment they felt sure they could find a home.

They were met by a Realtor who found them a 1900 square foot brick home with 4 bedrooms and 2 baths and a covered patio sitting inside the city limits on ½ acre lot. Sounds like a dream home and a dream price of $79,000. Neighborhoods and condition mean a lot and the house appraised for the selling price, barely. The mortgage company was accommodating with the bankruptcy and promised them a loan although they did not talk about the interest rate except to tell them that it would be high because of the financial problems.

David was never questioned about his eligibility for Veterans Assistance. Since he had served for 8 years in the USMC he could have possibly qualified for a VA loan. They did not talk to him about FHA programs which he may have qualified. What the mortgage company did was to pigeon hole this unwary mortgage shopper as a sub-prime mortgage client and set out to make a lot of money on a small loan.

David was offered the best rate of 10.5% when the current FHA & VA rates were at 5.25%. This was on a 2 year adjustable rate mortgage and at the first adjustment the rate would go to 13.5% and then adjust again every 6 months. He and Cheryl were told that if they made their payments on time their credit would improve and they would be able to refinance the home at a better rate in two years.

Fast Forward to July 2007, David and Cheryl contacted a local mortgage company to try and refinance their home. All their payments have been made on time. They have no derogatory credit items for the last 4 years and David's income has gone up as well as Cheryl has now graduated from Nursing school and just started a new job. All things seem to be in good shape for them.

Until they find out that they have paid only $1200 off of their original mortgage and since it was a sub-prime 100% mortgage they still owe over $78,000 on the original note. Now in most markets this is not a problem but they where they were forced to buy the neighborhood surrounding them has actually gone down in value. Their home was appraised at $75,000 which is less than $50 a square foot and the insurance company will not even insure the home for less than $50 a square foot for replacement value.

This couple is unable to lower their mortgage payment and instead on September 1st their payment will go up more than $300 every month. Did the mortgage company take advantage of this couple? Yes they did. In the final accounting the mortgage company made $6000, the real estate agent made almost $4,800 and the attorney and other fees associated with this loan were over $3,000!

Everybody made out great and at the time David and Cheryl thought the people they were paying for help actually did help them. But the reality of it all is the people who were regulated by laws were able to use those same laws to take advantage of this couple not out in the open but by leaving out some very important things. By not exploring all of the options that were available to this couple they are now in a world of hurt.

Reviewing this file with a VA underwriter from a large investor says that this loan would have been reviewed but would have been reviewed but in all likelihood would have been approved at the current VA rates and the Taylor's out of pocket costs for fees and expensed would have been under $4,000 total.

Again and again the lesson of Buyer Beware is never more important than it is today. Be aware of what is going on and ask for referrals from you friends and co-workers. Make sure you ask questions about government loan programs and assistance. Good luck in a tough market and learn from the tough stories of those who have gone before.