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The first was my quandary with the movie the Big Short. It was very thoroughly researched. Wonderfully acted and absolutely accurate as it showed us the scheme of 2-20-80 ARM (Adjustable Rate Mortgage) loans and 3-20-80 ARM loans that were tied to exponentially raise the interest rate of the Promissory Note on the 2nd or 3rd Anniversary of the closing of the loan.
I have never met a truly deadbeat borrower. I have met mostly honest hardworking people who had been given home loans that not only were impossible to understand, these loans were not survivable under the best of circumstances.
a. This loan was $168,000 at 6.0 interest-only for two years. That first payment was $840 for 24 months and there was no principal paid down at all over the two years.
b. buried in numerous references to interest and changes on the first of the month etc. was a line that read "The interest rate I am required to pay at the 1st change date will not be greater than 13.750% or less than 10.750%.
Now if we take the best of those circumstances, my clients and friends will jump on the 1st of the 25th month to nearly 11%. So, they were qualified to pay $840 at closing, but now even though interest rates had gone down over the last two years, the payment will now jump in one month to somewhere between $1,568 at 10.75% to $1,957 at 13.75%. From $840 to between $1,500 to $2,000.
Just like me thinking I could change the clutch out of a Ferrari, I would not be able to even read the instructions in the manual. That is all that this Borrower did. He believed that the Lender would treat him fairly because he had no idea what the words meant in the loan instructions.
I'm sitting here looking at a Promissory Note and Security Instrument from a deal in a non-judicial foreclosure state. The security instrument, in this state, is called a deed of trust. In a Judicial Foreclosure state, it usually would be named a "mortgage". This is problem number one. At the time the US constitution was being written and laws were being formed, no one in that time would have envisioned in any way that there would ever be anything but judicial foreclosures. Non-judicial foreclosures are the most onerous laws in the country. They actually can work if everyone plays it square, but attorneys wrote these awful laws and Investment Banks (insert here "stockbrokers") figured out how easy it was to lie, cheat and steal using them.
But, I am beginning to wander a bit. My problem with the Big Short and movies like it is that it indicates that many home loans were written to standards that were not acceptable under law or operating norms. In fact, the ratings companies were assuredly surely taking bribes to rate the big bundles of loans (known as Mortgage-Backed Securities (MBS) or Collateralized Debt Obligations or (CDOs) higher than realistic or really higher than fathomable. These are the bad loans.
The loan called 2-20-80 is simply not something ever seen before. But, as you learned in the Big Short, at the peak of the mortgage fraud crisis in 2005 tens of millions of people were were swindled with this loan. (You didn't know you learned that did you?).
Here is what the name of that loan means. The initial rate of interest is very low. But, in two years it is going to go up by arrangement. The one I'm looking at was a client of my real estate document consulting company that was suing the "named lender" on the Promissory Note and Deed of Trust.
The description of the terms of this loan was not something I was aware of in 2004. I owned the Mortgage Company that made the loan on my own house and I had an Adjustable Rate Mortgage (ARM) loan that closed in 2004. From that date until 2011 my rate went down continuously because it was adjusting with interest rates as determined by the Ten Year Treasury Note. I did not notice all of the loans tied to a certain date that the interest was going to "adjust".
Now just maybe I would have noticed that I was being quoted $840 per month, but I was going to jump to as much as $2,000 per month. which is more than double, but I'm a real estate expert.
He saw that millions of loans were going to become unaffordable at nearly the same time.
Those were bad loans. But the majority of the Borrowers were not Bad Borrowers.
They were Swindled, Borrowers.
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