Uncharitable mortgage pitches Promised 'deals' often result in loans fraught with peril

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Uncharitable mortgage pitches Promised 'deals' often result in loans fraught with peril
 
By Chuck Jaffe, MarketWatch
Last Update: 10:22 AM ET Nov. 9, 2005  
 
 
BOSTON (MarketWatch) -- Charity left a pleasant-enough message. She's in the "Mortgage Interest Rate Reduction Department" and she was calling about my home loan. She left a number and a time to get back to her. 
 
It so happens my wife and I are squeezing one more refinance out of the mortgage market, so there was a slim chance that Charity's message was actually about our new loan, rather than about any loan.

But when I called the number, a woman named Brittany answered. Forget Charity, she could help; and forget my financial institution -- she had never heard of it -- she could do "better."

"No matter how low the rate on your new mortgage," she told me, "I'm sure one of the institutions we work with can get you a better rate."

If you haven't put yourself on the national do-not-call registry, there's a good chance you're being bombarded with calls about sweet loan deals, improved deals on consolidating debt and more. (Charity called on my work line; calls like hers are part of my job.) If your phone is off limits to the lenders, the attack may come by postcard or direct mail, filled with information gleaned from public records about your specific loan, promising to refinance your original amount to a rate as low as 1%.

But no matter how they come at you, these mortgage offers are fraught with peril, starting from the mindset they cater to down to the actual execution of the deal.

"Their job is to come up with a better deal for you," says Gerri Detweiler, author of "The Ultimate Credit Handbook." "It may or may not be a real deal, something that you could actually qualify for and get, but they're going to promise you a 1% or 2% or 3% deal or something that is enough to get you to submit an application and for them to pull your credit report."

"What you get after they take an application and pull your credit may be very different than what they first suggested over the phone."

The real problem, said Detweiler and others, is that the entire approach is backwards. In general, the way to find the best mortgage deal is to first review your credit and to determine what you can qualify for before ever talking to a mortgage lender.

Part of the problem is agreeing to take a mortgage based solely on the monthly payment, because deals can be structured to lower payments without actually making progress on a loan.

And it's not just interest-only loans that can work that way.

"A lot of these types of pitches are leading people to an option ARM, sometimes called a pay-option ARM," says Greg McBride, senior editor at Bankrate.com. "The carrot they dangle in front of the borrower is an interest rate as low as 1%. The stick that comes at the back end is that the 1%, or the payment based on that 1%, is not enough to pay the interest due and negative amortization -- where your balance is actually growing -- comes into play very quickly, sometimes as soon as your second payment."

A pay-option ARM gives borrowers several choices for making their payment each month, typically running from a 30-year fixed-rate amortization schedule to an interest-only option to a "minimum-payment" choice.

The "pay rate" for that minimum-payment option is the 1% special. The actual loan rate, however, can escalate quickly from there so that interest is charged at a rate of 5%, even though it is being paid off at 1%. The result is a "less-than-interest only" loan, where the balance is actually growing despite the payments being made.

Not for Main Street homeowners

These kinds of deals do have an audience for whom they are useful, typically corporate executives who get a lot of their pay in bonuses or entrepreneurs whose income stream can fluctuate greatly. But they are not for the average homeowner. (They also can come in handy for a consumer with poor credit who has had trouble finding a lender willing to take a chance on a better deal.)

This is a niche product being marketed to a mainstream audience under the guise of how much a lower payment can "help" make things better for the long haul.

Even if a lead-generating service can find a financial institution that offers a more traditional mortgage and that comes up with a competitive rate, experts warn that hidden fees can be a problem.

Says Detweiler: "You're so busy listening to the rates they come up with that you don't hear all of the fees associated with it. You're supposed to get all that information within three days of submitting an application, but by that time you are excited by the deal and you may look at the numbers and think they're not so bad."

Another issue is that the multiple credit inquiries that can result from applying to a lead generator can wind up muddying a credit report and lowering a credit score. For consumers serious about getting a refi done this can grow into a problem if they turn away from the promised telephone or postcard deal and go to a more traditional route.

In the end, it's important for consumers to recognize that there is no "Mortgage Rate Reduction Department" out there working for you, and the phone calls and card pitches don't represent providence smiling upon you and bringing you a better mortgage just at the time you were hoping for something better.

Moreover, consumers should realize that sometimes they may be "doing better" with their current deal than with whatever scheme these pitch artists come up with.
 

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
   
 
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