PAY OPTION ARM LOANS THE EQUIVALENT OF LAMBS LED TO SLAUGHTER The Pitch ”The Asset Builder Loan is the most efficient way to finance any real estate. As its name implies, this loan gives you the power of cash flow to help grow your asset base. The additional cash flow generated for you every month via a negatively amortizing feature allows you to channel funds for greater rates of return than sending them to us! The loan frees up cash flow for the borrower in a way that allows for control over more real estate for a given monthly payment. The more real estate you control, the faster you accumulate equity, the faster you accumulate equity, the faster you eliminate debt. Real estate is usually the largest asset owned by most people. Traditional approaches to financing real estate with fully amortizing long term loans of 15 to 30 year terms produce very little “bang for your buck” when it comes to accelerated equity appreciation. These loans offer absolutely no flexibility when it comes to monthly payment choices. The Asset Builder Loan, with its three monthly payment choices is designed to give you complete payment flexibility, putting you in the drivers seat when it comes to choosing how much to pay the bank every month. We have produced some unique calculators to help understand our loan products more clearly. Your real estate investment advisor will be happy to answer any questions.” The Calculators SUMMARY Based on a $500,000 Loan Traditional Fixed Loan Payments: $3,078.59 Your savings over 5 years: $88,988.16 Your home's appreciation over 5 years: $169,112.79 (according their calculators default setting of appreciation of 5% per year) So they are implying you will be ahead $258, 100.95 with no deductions or offsets. This ranks right up there with the “phantom profits” they claim associated with this loan. Do you see any negative amortization figured in? Do you see that if the home doesn’t appreciate but instead depreciates, and if the negative amortization is figured in the figure will actually be a negative number of savings? If the house depreciates as is happening in many markets, then the scenario is as follows. Reduced payment savings $88,988 over five years as presented. Minus negative amortization of at least $133,482 +(more if interest rates go up as these loans float on indexes and margins) Savings is now (–44,494) Minus depreciation of just 10% in the entire five years, not per year. Savings is now (-$94,494) Minus costs incurred in closing the refinance into this loan in the first place and the closing cost to re-sell, as homeowners can’t afford the recast payment. (-144,494) For a whopping savings of ZERO with a debt load of –$144,494. So if your home was worth $500,000 and then the adjustments above take place, you will have to pay someone $144, 494 to buy your home just to get out of it. Not an unlikely scenario considering real estate values are deflating not appreciating in most markets. If somehow you hold the keys to a fabulous property that achieves that rate of appreciation in a declining market and the promised appreciation actually takes place, it will not provide you with a savings of $258,100 as shown in their calculators. Actually even under that scenario if you account for the negatively amortized principal it would actually be $123,582. So five years from now if somehow as if by magic the real estate market flies off the charts again, you “might” be okay. This is a huge gamble for the average American family. The gamble: Bankruptcy and foreclosure or a little profit and solvency. In the theories presented everyone should be taking the little bit of savings in their monthly payment and investing it in even more real estate to gain assets and build wealth. Well if you use that strategy right now, I know you need to see a doctor. But wait, maybe in just a few months now the new strategy will be to help all their rich friends buy up all the foreclosed real estate and rent it back to us. After they’ve driven half of the Nation into foreclosure, the rich investors can come in a steal their houses for pennies on the dollar. I knew there was a bright spot for them. Some people have asked, or outright accused borrowers, Are you stupid? No one could offer an interest rate of 1%. I was recently asked this question by a professor, who is a CPA at a major university. My reply to him was as follows: When you get the first hundred direct mail flyers offering 1% you throw them away with just that thought. Then somewhere in the middle of the next 100 flyers which state boldly; 1% Don’t miss out, 1.25% Why pay more, 1.9% This is the best product in the market, you start to think, hmm, maybe I’m stupid not to do this. Then you bite and call the number on the flyer, you just pick one from the pile that has the lowest rate. 1%. The far away voice on the other side says; this is a great deal, I can do this for you. With that you start the process. You shell out $400 for an appraisal that the anonymous voice says he wants right away. It ordered the same day. He rushes you saying rates can change at any time. If your credit scores drops even a little I may not be able to do this for you. So you move quickly. Then the bait-and-switch ensues. No Good Faith Estimate is provided right away. He waits a little while to make sure the appraisal is done and you have some money invested in the transaction already. Then he tells you only verbally what your house is worth. The appraisal is not provided even though you paid for it. He says your house is worth a bundle, you’re sitting on a gold mine! Then the Good Faith Estimate arrives and the terms look like what he said. Overall it looks okay. Then between Good Faith and final closing only two weeks later, every term, every fee, is all changed. You start to bulk, but the faceless voice reassures you and says this is still a great deal because you are getting a 1% interest rate and your house is worth a bundle. So reluctantly you go forward, it’s too late to start over with someone else. But now, with the first tinge of sickness in your stomach, you are uneasy. The settlement service notary who was forced on you by the lender comes to your house to do the settlement. No meaningful conversation is conducted. He just says sign here, sign there, while your kids are distracting you screaming in the background. The loan begins and two months later you get your first statement. It still doesn’t reveal much because you got the 1% for the first month and nowhere is there an accounting for negative amortization. Then the next statement comes and you get the first real look at what you just did. BAM. You realize you just committed financial suicide. This loan went from the euphoria of the direct mail flyer of a 1% interest rate, to the sinking feeling something smelled, to I’m dead. All of the sudden what you thought, what you were promised is not at all what you got. So to all those who just say the borrower was stupid, consider the sophistication of the manipulation. The control the lender executes through a web of things under their total control. I like to say that there is a disconnect for people. In the past lenders made you jump through hoops to get a loan. They cared if you would be able to pay for the loan they gave you. So people have a tendency to think lenders wouldn’t be offering them a bad loan they couldn’t afford. There also is a level of trust earned by years of legitimate banking. Bankers and lenders, in the not so distant past, have been the pillars of communities. Respected, as upstanding citizens. Considered financial experts. Now these fly by night, take their profits and run lenders are nothing more then white-collar criminals leading the lambs to slaughter. If our government doesn’t step up and stop them, the crisis we are seeing now will increase ten fold. Why? Because as more and more homeowners are becoming stressed financially, these companies are now pushing the Pay Option Negative Amortizing Arms as a solution to their problems to lower payments. The new pitch, Arms are resetting better lower your payments. The Pay Option Arm can do that for you. More and more homeowners desperate for a solution will bite. Everyone will be doing no more then renting their house until the reset happens then losing their house because they can’t pay. What’s the next pitch going to be then? Rent this house from one of the 2 million we own. Maybe you can rent your house from your lender after they can’t sell it for a year or more. I was horrified to see some lenders who already were put out of business have started up again under different names. Synergy is now Citizen Trust Financial Group. Sounds like a trustworthy name, doesn’t it. Until you look up Synergy’s past. Then there’s the new lenders, just now starting to offer this loan. I shook my head in disbelief. Even as Wall street investment firms sue lenders to buy back loans, new lenders are rolling out this “financial tool to build wealth” loan. Is this a joke? If it is I don’t want to see the punch line. With real estate prices falling how can a negatively amortizing loan be good for anyone. Principal goes up while value goes down. Consider this. Selling Benefits to the lender on the 1% Pay Option Arm Lenders can mislead borrowers by using the 1% to alter the APR thereby making them appear less then they actually are. Lenders can mislead borrowers as to interest rate they will actually be charged. Lenders can qualify people at a lower rate. Lenders can charge a higher rate by using margins and indexes. Benefits to Lender Beyond Sale of Loan. GAAP-Lender can count full payments as income on books (phantom profits) when they are receiving less then half of the payment. Investors pay more for these high yield loans. Profits from affiliates and divisions on closing charges for transaction itself. Profits from “selling off” the loans they create with no regard to performance of loans. Falsely presented value of companies stock using phantom profits to investors. Owners, officers of company take huge profits selling stock. Golden Parachutes. Company executives take huge salaries before the company implodes. Golden Parachutes. Benefits for Borrowers? Temporarily, slightly lowers the monthly payment while adding a huge amount monthly to the principal balance of their loan. Tragedy for Everyone Investment firms will be left holding the bag when lenders can’t buy back loans. Individual investors (lambs led to slaughter) will own worthless stocks. Borrowers (lambs led to slaughter) will be in bankruptcy and foreclosure. Government ( helped create the problem) will somehow have to pick up the pieces of the broken lives and economy as a whole. Everyone’s house prices will fall with the foreclosures dumped on the market. Taxpayers will pay for the government services all these, bankrupt, homeless families will need. Is it criminal? The concept that they offer is, That it is a tool to build wealth and eliminate debt. The lender could only argue they offered this loan because they believed in the concept behind it if they were the ones holding the risk associated with it. But they are not. They sell them quickly off to someone else to assume the risk. Also, if it is such a great product, then why have so many of them gone to such great lengths to conceal the nature of the loan. Why not call it what it is, not a pay option arm, A NEGATIVELY AMORTIZING ARM. Why don’t they send out flyers boldly stating: 1% TEASER RATE FOR 1 Month* so we can qualify you into a loan you couldn’t otherwise qualify for. But it’s okay that’s enough for us to get it through investors.** Just for YOU a NEGATIVELY Amortized Interest of 8%*** which will increase monthly due to floating with the index and based on your margin****– This is way better then that crummy rate of 5.25% you have locked in now and pay every month. Pay a little less now and-PAY a lot later!***** It’s the American Way. ******And when the payment comes due, don’t worry, we’ll refinance you for being a VERY SPECIAL CUSTOMER!******* *If your loan closes on the 6rd of the month then your teaser rate will only be 24 days. ** Investors deserve to be duped, because they pay us high commissions to steer you into these loans. *** As your balance increases with Negatively Amortized Interest you will be charged interest on the interest we are deferring in this great program. Don’t worry your house is worth a bundle. ****Index figure can be found by….well….you look it up, it’s at the library or you can write the board of Governors. Your margin will be determined by your race, gender, and overall intelligence. You know, by how much we can screw you and get away with it. ***** If your house depreciates instead of appreciating you will owe us a lot of money you will not have the money to pay. Don’t worry we’ll foreclose if you can’t sell and take the problem off your hands. ******When you are already trillions of dollars in credit debt, what’s a few hundred thousand more between friends. Besides our CEO needs a new Ferrari, he got drunk and totaled the last one. Boys will be boys. ******By the time your bill comes due we will have figured out some kind of rent to own loan, or lets face it anything can happen you could get hit by a car tomorrow. Live for today! None of us really own anything anyway. THIS IS GREAT!! CALL ME TODAY!!! We can make this loan happen by: 1. Sending you a very generous company friendly appraiser. 2. Filing out your loan application and making sure it reads like a good story. 3. Violating a few minor federal and state laws like TILA, RESPA, RICO, DBPA, Consumer Protection Act, ECOA, etc. No big deal. The fines are minor. 4. We’ll read you a fairytale called the “Good Faith Estimate.” 5. We’ll not disclose and not bog you down with the details in the fine print. We know you’re really busy and stressed out and really don’t understand anyway. 6. We’ll give you the feel good treatment for one month with a 1% interest rate. 7. We’ll promise you that real estate will appreciate and just stick to “Happy Talk” so as not to depress you. 8. We’ll pay the broker an exorbitant YSP for, um, well we’re not quite sure for what. Oh yeah, now I remember, sorry brain freeze, for slamming you good. 9. When the regulators are on to all of our games, don’t worry we’ll find another way to make this loan, or a hybrid of this loan. We’re the masters of disguise. 10. Don’t bother reading the disclaimers, just relax sit back and watch your TV and wait for your house to grow cash and riches to fall from the sky. 11. We’ll delay your pay off for a few days so you can pay the interest on two loans for a few days. We really hate to ask to do this but it’s been a rough year for us and we’re doing you such a big favor giving you this loan. Being a woman, self-employed and with all that debt, all things considered, no one else would give you such a great deal. We are just charging a little extra for that over what we would charge if you were a white male in the same circumstances. 12. Don’t worry about us though, even if the regulators come after us, and Wall Street investors force us to buy back loans, we’ll be back real soon with a new name and we have your name on our mailing list under, Gullible, we be in touch with our new and exciting programs. See you soon. Oh, you think you won’t recognize us under our new name. You will by the outrageous programs we will be offering. We’ll even tell you who we used to be. The regulators will take years to catch up with us again. By that time we will have made another billion. No worries, it’s all-good.