Negative Amortization and Sub-Prime Loans: What's Not To Loathe?

Who is John:  John D. Roussel is owner of ProStar Home Loans with eleven years of mortgage experience in single family lending in Northern Nevada.  He is a member of the Mortgage Bankers and Builder's Association of Northern Nevada.

Note: This 3-part article is not meant to encompass all the details regarding the topics mentioned.  Our hope is that through John's experiences we can all learn something new and hopefully aid us in our decision-making.

About this post: John shares his heart on what he thinks on the perils of getting a negative amortization and Sub-prime loans. 

Why he is still the number one fan of 30-year fixed rate notes. 

And finally, John answers the proverbial question, " If you had two minutes..."

What can we learn from this market downturn and the tough lessons that came with it? how can we can prevent this from happening again. (meltdowns,sub-prime mess,foreclosures, real estate bubbles)

"My answer to your question is if you can't qualify using a 30-year fixed rate note. You are buying too much home. Period."

We really need to do better at our education. As a country we need to do better. We aren't arming our students with the correct information. They need to understand the home buying process.  They need to understand credit. They need to understand balancing the checkbook. They need to understand some finance; basic skills that are going to get you through life.

My answer to your question is if you can't qualify using a 30-year fixed rate note. You are buying too much home. Period.

If you have to do a 5-year adjustable rate note in order to qualify for that home, and you're not getting significant raises (salary), you're in trouble; you will lose that home. There's a very small segment of the population where an adjustable note make sense.

We as a company don't believe in 'em. If you look at our numbers, in all of the loans we did in 2007, we only did four adjustable rate mortgages . Now we are a company of twenty people, we do a lot of loans, but only four times it made sense(adjustable rate mortgages). That's it.

If somebody can't qualify for a 30-year fixed rate note, they just need to buy less house. And thank God the market has come down where houses are much more affordable.

The people who said two years ago “geez I can't qualify for a 30-year fixed rate note.” What a great position they will be in now! They're getting the same house that they wanted for a hundred thousand dollars less. And now they qualify making the regular income and they don't have to count on making extra money down the road.

Here's another thing I wanted to tell you- negative amortization loans (what is negative amortization?). The negative amortization loans was designed for a specific type of person.

"The negative amortization loans was designed for a specific type of person."

It was designed for an investor who owned a vacation rental. Because the house rents like crazy six months of the year and stalls the other six months. So through this loan they can have the leverage that they need to stay afloat. And that loan as far as I know would be dangerous, to say the least, for everybody else.

Truth be told, it was a complete greed on the lending side to offer negative amortization loans to common people. Thank God they're bringing down legislation to change it. In my eleven years in this business, I have done two negative amortization loans. It made sense for two people. And that was it.

Wall Street and the lending business got really greedy because they saw the future value of these notes. They saw that these notes(negative am, adjustable rates) would be going up in value of nine to ten percent once these things started adjusting.

However they did not factor in that John Q homeowner couldn't make that payment. So they started paying lenders and loan officers exorbitantly more than a 30-year fixed rate note in order to sell that product.

And the greed that was in the industry was what perpetuated a lot of these problems. “If it sounds too good to be true, it is”. It was created within the industry. And I will agree with what Congressmen and the Senators are saying, that there are a lot of greedy people that were trying to take profits. Thank God most of those people are out of the industry by now. There is a reason why the number of licensed mortgage agents in the State of Nevada has gone from 29,536 to 6,800.

 

If you had two minutes with a motivated homebuyer what would you tell her?

1. Buy the smallest house in the biggest/nicest neighborhood. That's where you get the best appreciation.

2. Make sure that you get your loan pre-approved so you can increase your negotiation.

3. Don't go anywhere unrepresented.

4. Make sure your Realtor is a great negotiator and is genuinely representing you.

...Read our 'friendly fire' dialogue on the state of the Reno real estate market

...Read John's take on FHA,VA and Conventional loans

John Roussel of ProStar Home Loans
985 Damonte Ranch Pkwy Ste.120 Reno,NV 89521
775-284-STAR (7827)
john@prostarhomeloans.com

Comments

[Clark]

Nice! at least someone is honest enough to tell it as it is. Wish it was earlier though.=(

keep em' coming!

[Ian Mariano]

Just doing our job Clark.

Thanks for the encouragement.

And it will keep coming.