Thursday, March 27, 2008

Stripped Bare - Beneath the Feel Good Veneer of Subprime Lending

Chapter 1 - Purveyors of the “American Dream”

For many years, now, the pinnacle of the “American Dream” has traditionally been sold to individuals as owning their own home.  Today, if you type “homeownership+American Dream” into the Google search engine, you will receive over one million possible results to review which offer various interpretations on this dream.  Most mortgage lenders, whether prime lenders or subprime lenders, also actively advertise this dream on their corporate websites, with promises that they can easily help you live the dream.

The dream of homeownership is a good dream, though the dream is not necessarily without its frightening moments.  Especially for those individuals who are purchasing their first home and applying for a home mortgage for the first time.  A fact I can attest to myself.

When I took the step of fulfilling the “American Dream” for myself, back in 1985, when purchasing my first home, my rudimentary knowledge of financing a home purchase was glaringly revealed.  Even though I was working with an individual I knew personally and trusted, and who was a certified mortgage banker, I still walked away from the mortgage application process in a somewhat dazed and confused manner.  Today, many first time homebuyers still can attest to this.

When a first time homebuyer sits down with a mortgage lender, they will be bombarded with questions, unknown lending terms, and stacks of official documents requiring their signature.  The questions required to be answered delve into the individual’s work history, education, savings history, and credit use.  Highly personal questions, to most individuals, which are rarely discussed with even their closest personal friends.

Terms like amortization, points, buydown, ARM (adjustable rate mortgage), Balloon, escrows, to name but a few, come at the first time homebuyer in rapid-fire succession typically with only the most rudimentary of explanations, or, the terms are glossed over by the mortgage lender as being of little relative importance.  Unfortunately, many first time homebuyers will simply accept these most basic of explanations, or glossed over lender interpretations, rather than exhibiting to the lender their inexperience with the mortgage process.

The stacks of documents, requiring a homebuyer’s signature when applying for home financing, can also be intimidating.  The documents are full of fine print and cautions of prosecution for falsification, which are rarely read by the homebuyer, and the documents are typically paraphrased by the lender’s sales staff, to facilitate fast, question-less signatures.  Is it any wonder, then, that purchasing a home for the first time is a bit frightening?  Additionally, all the parties involved in the transaction; seller, Realtors, and lenders; seem to desire that the transaction be completed at the fastest possible speed.  Rush, rush, rush and get this deal done before the buyer gets too nervous to proceed.

Though applying for a mortgage for the very first time can indeed be a bit frightening, it does not need to be intimidating, or completely nerve wracking.  Though it can be difficult to remember, as an individual financing a home purchase for the first time, you are actually in control.  The processes which must be completed, as they say in the mortgage business “to close the deal,” cannot, and more importantly should not, be completed until you, the borrower, are fully informed and satisfied with your understanding of what is actually taking place in the transaction.  This is also true if you are simply refinancing a mortgage on a home you already own.

If, as a borrower, you have any questions regarding the mortgage loan, ask them!  If you do not understand what points are; a point is simply a fancy mortgage term for one (1) percent – one (1) point equals one (1) percent; ask for a thorough explanation from the lender.  If you do not understand what escrows are; escrows are monies you pay ahead of time in your monthly mortgage payment to cover yearly property tax bills or homeowner’s insurance bills as they come due; ask for a thorough explanation from the lender.  A good mortgage lender will ensure you receive a complete, and thorough, answer.

I know that when I went through the mortgage application process for the first time, I made my share of the mistakes mentioned above.  I did not want to exhibit my lack of knowledge about the mortgage process, so I accepted less than thorough answers.  I nodded my head in agreement, when I should have been shaking my head no and asking more questions.  I signed documents with only a cursory review, or a glossy lender explanation, instead of reading the fine print.  I looked at the list of fees charged by the lender, and simply swallowed hard, rather than inquiring into whether the costs could possibly be less.  In other words, I acted like I was a fully informed individual, when in reality I was bluffing both the mortgage lender, and myself, in regards to my grasp of the mechanics of mortgage lending and the effects such a commitment had on my daily life.

As the primary purveyors of the “American Dream;” mortgage lenders have the money you need to purchase the home you want; and they should be working diligently to make the mortgage loan process clearly understood.  Especially for first time homebuyers.  First time homebuyers, though, also have a responsibility.  Their responsibility as homebuyers, whether first time purchasers or sixth time, is to not let embarrassment at their lack of knowledge regarding the mortgage process get in the way of learning the process and understanding it.

Owning a home is a large responsibility, a long term financial commitment, and at times a financial challenge, not simply a warm and fuzzy dream.  After you sign on the proverbial dotted line, you will no longer be dreaming, you will be living the reality of owning a home and having to pay off a mortgage.  The reality of the dream of homeownership does not always mesh well with the “American Dream” as it is sold, or your current financial situation.

Posted by John Venlet on 03/27 at 10:40 AM
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