Now, this is the question: Would a reasonable person make the decision to accept these terms with a short term objective knowing the negative consequences? I say not. Are they naive? Maybe. I believe they were taken advantage of, as in FRAUDULENT and PREDATORY lending.

This Fannie Mae Mortgage Fraud Update, dated November 2006, has a pie chart (see page 1) showing that 0% of mortgage fraud is "predatory." (too few to matter)

But I agree with you, people should not be held accountable for contracts they chose to sign. Besides, what does Fannie Mae know anyway?

Peace!

Fairfax Resident, Peace! We are obviously on two different wavelengths. No futher comment necessary.

Merv,

The block quotes are from your 12/21 posting below, followed by my reply:

1) I understand completely real estate fraud. Realtors® have nothing to do with this issue except for me after the fact.

I had no idea you were with RE/MAX, but finding schemes involving (current or former) RE/MAX Realtors® was pretty simple. (see here, here , here, here, here, and, here.)

2) Your reference to Southern Maryland Housing Bubble News leaves me puzzled. First, I have absolutely no respect for Bloggers that give what some might call an extreme view of the world but remain anonymous. […]

2) […] Next, you somehow needed to reference real estate agent fraud by pointing to the article on his/her Blog titled "How To Screw Homebuyers And Doctor Statistics - A Re/Max Educational Series." I don't understand the point. As a matter of fact, the Blogger you read doesn't have all the facts. I checked both MLS references and the latest one has DOMP set to the beginning of the first listing, not zero. This occurred one day after this Blogger reported "Homebuyers getting screwed." The property referenced is still for sale. Agents don't make buying decisions for buyers. Period. So, who is getting screwed?

Yesterday, the Southern Maryland blog showed once again where another RE Agent reset the DOMM/DOMP to zero. This posting includes a link to a previous article they wrote, titled "How Local Real Estate Agents Deceive The Public.”

You seem to be simultaneously taking two diametrically opposed positions. On one hand, you admit that the buyer knowingly signed an agreement to the terms listed (Option ARM, adjusts after one month, prepayment penalties, etc.). On the other hand, you are trying to scapegoat the lender/broker for being “fraudulent or predatory.”

In your follow-up posting, you state: “Did they understand the complexities of what they were getting into? Absolutely not.” Well, you just answered your own question. Don't blame the broker/lender for the buyer's actions. Hold the buyer fully accountable.

And, you have pointed out the problem with the recent housing bubble. People were either naïve, irresponsible, greedy, selfish, impulsive, or …. _______ (fill in the blank).

By the way, I am a RE/MAX agent. By his logic and yours by reference, it must follow that I "screw" clients as well. Guilty by association.

3) I am well aware of what option arms are and what subprime loans are. Read the article again. A reputable broker/lender has recently reviewed their income and credit scores and can offer a 6.25% loan, no prepayment penalty if they choose to refinance again. Hardly a subprime rate. And, refinancing again is not an option. Look at the numbers.

6) The taps playing is a nice dramatic touch. In the future I will delete the link as it has no objective benefit to the discussion.

Happy New Year :-)

It is also sad that there people that are so calloused that they believe we all have fraudulent motives. Les' comments are also not helpful nor objective nor with any understanding. These are real people with a real problem that are not trying to take advantage of any financial system.

Les, is that you from Silicon Investor?

And in the end this couple is able to get another loan with minimal downpayment by falsifying their income by using no income verification mortgage. How ironic that they're now screaming about mortgage fraud...

Dear Leesburg, I don't think the average person has run up housing prices any more than the average person ran up the stock market. I do think investors have. If you subtracted individual and corporate and institutional speculation from the housing market, I think we would have had strong appreciation without the inflation. But, speculation in conjunction with easy credit is a flammable cocktail. Unlike the stock market, however, when housing has a bubble, everyone gets hurt.

Perhaps "regulation" was too strong a word on my part. But a more aggressive oversight is called for. Mortgage fraud is a leading consumer problem, and one that causes dire circumstances for many people (its not like you just get a bad TV and write it off, people are having their lives destroyed). Regardless, the only resource large enough to counter the recklessness of financial predators is the government. Individuals don't have the power. That is why we have government--to protect the weak.

Actually, I think most politicians are hard-working and sincere. But the bad ones get all the press.

I agree wholeheartedly with people being responsible for their own actions. Poor choices should lead to bad consequences. Thus, the crux of this string: did the lender know that Jose and Maria intended to sell soon? If so, the lender chose to ignore it and do what was in his/her interests. Consequently, the lender should be punished.

I disagree that lenders will be just as reckless if they hold the mortgage. I don't have the statistic in front of me but, if I remember correctly, most people default around years 4-5. If the lender holds the risk they will be more careful. They are in it for the money and will do what it takes not to lose that money. Under the current system, they have no "skin in the game."

Local leaders, if they are looking for anything, should look to diversify the job base beyond federal support organizations. And to a point that trend has been happening over the past several decades. But when you have the infrastructure problems that we have---and no answers or goals to work towards--continued growth seems silly. Why not just stop, go it slowly, and work these problems out (work out that inventory of infrastructure problems). I like Loudoun's rationalization for not approving that mega-development in Eastern Loudoun last month. Basically, they said we have too many problems to deal with at this time and need to resolve them before moving on. That is smart growth.

DC the next Detroit? Unlikely.

Dave, there are always two sides of the story. This housing bubble is no different. What caused it? Credit bubble offered by Greenspan, and Greedy of ordinary people.

As to government regulations, I don't know what to say. How many responsible politicans have you ever seen? How many bad politicans have you ever seen? To me to count government to do the right thing for ordinary tax payers is to day dream in rock n roll concert. I support limiting government to the min, and let people take care of themselves. It is the most economically efficient way.

Everyone shall be responsible for what they do. Have kids only when you can raise them. Condom is not that expensive. Rent apartment if you can't afford house. There is nothing to be ashamed if you can't afford raising a kid. It is a shame to have a kid and let others pay you to raise him or her. There is nothing to be ashamed if you can't afford a house. But it is a shame to buy a house you can't afford and let your family into financial trouble. I like Bush the idiot's idea of ownership society. But he got it wrong. Ownership society means we are responsible for our doings. It doesn't means everyone has to be a home owner.

As to securitization of mortgage, it is a good thing for home buyers. It enables people knows best of mortgage risks to own mortgage. As a result home buyers pay less risk premium. If mortgage generators own mortgage, it won't stop exotic mortgage. They only requires more risk premium, maybe 10.5% instead of 8.5% in this case.

As to NoVa vs Richmond, I really want to see one day NoVa becomes 51st state. There will people crying, but not me.

Last, my idea on controlling growth. Do we really have a sustainable regional economy in NoVa? In a little more than 2 years, Iraq war will be gone with B. the Idiot no matter which party wins. Federal spending will reduce significantly. No doubt NoVa will be hit hard. I think controlling growth today is like home builders not selling to investors in late 2005. Get as many suckers before the party is over. Do we really want DC area become another Detroit?

I hope "Leesburg" didn't get a cup of coffee today and doesn't really think these people deserve this. Given that the one manages a nursing home and that they are small business owners, $550k does not sound unreasonable. By new home standards in this area, that is a modest single family home.

Very few people can actually "afford" homes in this area, and it is discouraging when you can't buy a nice home or you can just barely pay for one and are under financial duress because of it. Most people in this area are stretched beyond what is financially prudent for housing, but that doesn't mean that it is their fault. Should they stop having children so they don't have to move? Should they all go get law degrees so that they will have fat salaries? Should they all up and move out of the area (which, by the way, several of my friends have because it isn't family-friendly to the budget)?

If we are to pass blame for housing inflation, it falls squrely with the financial manipulators and the lack of government regulation. Loose credit is at the root of housing inflation. People who should not be getting morgages are getting them, and that is the fault of predatory lending institutions.

On top of that you have mortage brokers who sign loans and then turn around and sell them to Fannie Mae and others. Why? because they reap the rewards of signing loans (fees, etc.) and then flip them and let someone else shoulder the risk. It is all reward and no risk. Want to decrease bad loans? Make lenders hold mortgages in their portfolio for five years before they can resell them. Then they will think twice about whom they lend to because they will lose if the borrower defaults.

Additionally, our local governments don't help. Northern Virginia has unemployment under 2%, which is inflationary due to a tight labor shortage. Why do local governments continue to pursue job growth? In particular, Fairfax County spends milliions of dollars annually--both domestically and internationally--to attract businesses. This only exasperates the problem. And then they point to Richmond saying it it the Commonwealth's fault that we don't have the proper infrastructure after the local governments are the ones that continue to approve development projects.

Housing costs are a complex matter. But this I know: It ain't Jose and Maria's fault.

The only question here is whether or not lender knew they need to sell the house within 9 months. If lender knew, it is probably fraud regarding prepayment penalty.

As to mortgage rate, we couldn't judge the old rate with what they could get today. It is different. No argument here. Can't argue commission either.

I don't think they could afford their new home. That makes their situation really bad. It is sad to hear the story, however aren't they the ones who drove up home prices and destroyed homeownership dreams of a lot of otherwise qualified buyers? I am not going to say they deserve it, but I won't argue against anyone who says that.

First, I'd like to thank Merv for this site. I've been following it for months as we move from our Fairfax townhouse and are building a Loudoun single family home. This info is incredibly valuable. Thanks Merv!

Second, this reminds me of my own family's history after my great-grandfather died in a mining accident and a lawyer took advantage of my Polish-speaking great-grandmother and had her sign over all her assets. My mother's family lived in poverty for 30-40 years afterwards.

And my father is a Realtor, so this is striking several emotional chords, not the least of which is that it is patently unfair. So, what to do about it now?

1. In any case, the facts need to be ascertained correctly. Be certain that the lender did indeed know that the family was refinancing to build a new home and it was not "lost in translation". If the lender knew, then it is fraudulent.
2. Report the lender to the BBB. I'm sure they are overloaded with such instances, but every instance is important to report. If nothing else, it may pressure the new mortgage owner to waive or reduce the fee, or at least reconsider doing buisiness with the original mortgage company.
3. Make noise. Write the newspaper--once you are certain that the lender did this fraudulently--and maybe they can write a piece o nit and use their name openly.
4. If it makes financial sense, see if the builder can delay the house. Given all the problems that sellers are having selling their homes, builders are being accomodating. Tell them the story up front and it might help. Turn it into a good PR piece for the builder (they couls use some) and then make noise on their behalf if they go with it.
5. Rent the current home until after one year is up and then sell it at no penalty, or list it now but have the closing date after the one year mark. They can even rent it below market to ensure it rents and then it will offset some losses
6. The earnest money deposit is not a down payment. The final down payment isn't determined until before closing. If needed, they can put the minimum down (5%) to get a decent rate and then keep the rest to pay off the costs.
7. For future reference, find a bank or credit union (my preference) you trust and use them for all your financial needs.
8. As Merv said, he can list it for free. That is about the one thing we can control here and it sounds like a good Christmas present.

I hope some of these ideas help.

Fairfax (now Ffx) resident, I try very hard to respect every one's views even when they are much different than my own or even stike a raw nerve. There are more than a couple of propositions in your comments I take issue with:

1) I understand completely real estate fraud. REALTORS® have nothing to do with this issue except for me after the fact. I also understand appraisals and appraisers. The vast majority are reputable. Some are not.

2) Your reference to Southern Maryland Housing Bubble News leaves me puzzled. First, I have absolutely no respect for Bloggers that give what some might call an extreme view of the world but remain anonymous. Next, you somehow needed to reference real estate agent fraud by pointing to the article on his/her Blog titled "How To Screw Homebuyers And Doctor Statistics - A Re/Max Educational Series." I don't understand the point. As a matter of fact, the Blogger you read doesn't have all the facts. I checked both MLS references and the latest one has DOMP set to the beginning of the first listing, not zero. This occurred one day after this Blogger reported "Homebuyers getting screwed." The property referenced is still for sale. Agents don't make buying decisions for buyers. Period. So, who is getting screwed? By the way, I am a RE/MAX agent. By his logic and yours by reference, it must follow that I "screw" clients as well. Guilty by association.

3) I am well aware of what option arms are and what subprime loans are. Read the article again. A reputable broker/lender has recently reviewed their income and credit scores and can offer a 6.25% loan, no prepayment penalty if they choose to refinance again. Hardly a subprime rate. And, refinancing again is not an option. Look at the numbers.

4) Many people will eventually feel the pain by getting into loans over their heads. It was all part of the "gotta have it now" real estate hysteria. Most of these people were making a calculated bet that the boom times will last forever, salaries would increase, etc. My clients were not betting on anything. They did not take out a 100% loan. Quite the contrary. It was an 80% loan based on the inflated appraisal. They believed they were taking a conservative step to moving into a larger house to better accommodate their family. Did they sign all the papers? Of course. Did they understand the complexities of what they were getting into? Absolutely not. A reasonable person would not have put themselves into such a short term negative position if they understood. Conclusion: I believe they were taken advantage of because of their lack of understanding and the language barrier. I am having a hard time understanding how any reputable broker/lender would even offer such an extreme package knowing their short term objective. PREDATORY LENDING (defined as "the practice of convincing borrowers to agree to unfair and abusive loan terms.").

5) If it is your intent to educate my readers about the doom we face in foreclosures, you have accomplished that goal. I don't see how it has anything to do with the subject. Also, I object to REALTOR® bashing by way of reference. Are there some bad apples? Sure. I say we find them and get them out of the business. The vast, vast majority of us provide a valuable service to clients and do it in an honorable fashion as "independent contractors" trying to make an honest living.

6) The taps playing is a nice dramatic touch. In the future I will delete the link as it has no objective benefit to the discussion.

By the way, is Fairfax (aka Ffx) Resident your real name?

I apologize in advance if there is anything in my response that may offend you.

There should be a law passed that makes it very difficult to have a pre-payment penalty on a mortgage loan. Or maybe if one exists, some type of document must be signed stating in BIG LETTERS in several Languages, the details and pitfalls of continuing with this loan.

If a real estate agent pocketed thousands of dollars over and above the regular commission by giving the buyer and seller misinformation, that could be fraudulent. Or, if the appraiser inflated the value of several properties, that could be fraudulent.

When someone signs a contract and doesn't understand what the contract says, s/he has no one to blame but themselves. If the buyer simply chose to believe what s/he was told without reading what s/he signed, then s/he has no one to blame but themselves.

The provisions you itemize above are simply the way many (if not most) I/O / ARM loans are written (penalties, etc.). One of the questions re: the 97 - 217 days, is how many "DOM" have simply been reset back to zero?

I understand that you say that you do not think that the loan was sub-prime. Sub-prime loans, by definition is "lending to borrowers who have less than ideal credit." Many people take out Option Arm loans because the cannot afford the payments any other way. And then, when the payments reset, these people will foreclose.

The reality is that there are many thousands of loans similar to what you are talking about, and the D.C. area is one of the worst areas.

With a bugler playing Taps in the background, we learn:

1) 2.2 million subprime loans face foreclosure; and,

2) the VA-DC-MD-WV area is ranked #9 in defaults in 2006, a 177% increase in foreclosures from 1998-2001.

Top 10 areas in 2006 foreclosures:

1. Merced, CA (25%)
2. Bakersfield, CA (24.2%)
3. Vallejo-Fairfield, CA (23.8%)
4. Las Vegas-Paradise, NV (23.7%)
5. Ocean City, NJ (23.5%)
Fresno, CA (23.5%)
7. Stockton, CA (23.4%)
8. Reno-Sparks, NV (23.2%)
9. DC-VA-MD-WV (22.8%)
Santa Ana-Anaheim-Irvine, CA (22.8%)

Yes, only California and Nevada (and Ocean City) have higher foreclosure rates than DC-VA-MD.

This blog has charts showing the number of sub-prime loans resetting over the next several years. The picture isn't pretty.

The summary on this blog says:

* The CLR expects 2.2 million mortgage loans with a value of $164B to eventually fail. Cause is accountability disconnect in the chain brokers, borrowers, lenders, and trustees in sub-prime market * The sub-prime market is huge–25% of all loans made since 1998 were sub-prime. * More than 20% of sub-prime loans made since 1998 will end in foreclosure. For comparison, the infamous "worst case" Houston housing market of the 1980s experienced a 15% peak foreclosure rate with 1 million homes abandoned. They are predicting a greater than 2x worse problem.