Mortgage Loan Product Hazards
Which Loan Products are the Right Ones?
A lot has changed in the world of real estate finance over the past 6 or 7 years. Historically low interest rates, tremendous liquidity in the mortgage backed securities market, weakness in the US dollar and strong job markets have helped allow the formation of exotic loan products and over 100% leverage when purchasing or refinancing properties. Unfortunately, many of these new loan products were designed to be used by high-net worth / high income borrowers who do not make up a large percentage of the borrowers who signed up to use these loans. Today, we are hearing about the negative impact of the wrong borrowers using loans like Option ARM loans or negative amortization loans. These loans are great tools for borrowers to use in the right situations. However, many borrowers are using the minimum payment option to purchase properties and can barely afford the minimum payment let alone the fully-amortized payment.
Who Should Use Option ARMs?
Option ARM loans are not a bad thing, although you would not guess this by reading the newspapers and watching the news on television. Congress has even jumped on the bandwagon holding hearings and covering the ill-effects of negative amortization and Option ARM loans. Some people blame brokers and banks for making these loans to borrowers and others blame the borrowers themselves. Myself, I think that it is irresponsible for brokers to make loans to people who can barely qualify for a minimum payment on an Option ARM loan with no serious outlook for increased income in the near future or if the plan is not to sell the property in the short-term. I also think it is even more irresponsible for borrowers to sign their name to any document, especially a mortgage loan, when they don't understand the terms of the loan. You sign, you own. That is the basis of credit and the free market economy. If we were to lose the ability to hold people responsible for the contracts they sign, our economy would crumble in a matter of days.
Written by Jason Golod
Founder of Aventine Funding - Home of San Francisco
mortgage loans and Private Money Loans.
Copyright 2007. All rights reserved.