Posted by davidK/CA on 9/3/09 2:38pm
Msg #302798

Are the crooks back?

It's an adjustable loan with a 6.25% minimum interest rate and a 12,25% cap based on the Lender's prime rate, with changes to the interest rate whenever the Lender's prime rate changes, without any limitation on the rate change other than the cap. 25 year amortization of loan with a fixed payment for 15 years.

There is a six month interest prepayment penalty during the first year. The Borrower is required to pay to the Lender at closing $6,500 as a "prepayment reserve". I never saw that one before. Pay up front for a prepayment penalty that may never occur.

How do they invent such gimmicks?

Reply by Shoshana/AZ on 9/3/09 2:52pm
Msg #302802

That's a new one on me.

Who's the lender???

Reply by davidK/CA on 9/3/09 4:20pm
Msg #302812

Re: That's a new one on me.

It's a small bank. One that you and I likely never heard of.

Reply by Shoshana/AZ on 9/3/09 4:33pm
Msg #302814

Maybe it's a hard money loan.

Lately, they have been showing up in various forms.

Reply by Charles_Ca on 9/3/09 4:39pm
Msg #302815

When you say crooks have you considered

the circumstances of the loan? Have you considered the risks involved with that particular borrower. Do you think that banks sould not be rewarded for taking risks, also would you support indemnifying banks from losing money on risky loans. i really don't understand where people get these notions? Not all lenders are the same. Have you noticed in car ads that some interest rates are set aside only for the best credit risks? Don't you think it costs banks money to service people who are poor credit risks? I don't understand notaries who question financial information when they are not fully aware of the borrowers needs and history.

Reply by Shoshana/AZ on 9/3/09 4:44pm
Msg #302816

Re: When you say crooks have you considered

I am an LO. The lenders we deal with would not charge a prepayment penalty up front like that. They will just deny people below a certain credit score.
That kind of loan must be a hard money loan. They pretty much get away with anything.
I notarize car title loans for a certain company. Typically, the APRs on those loans are 75-85%!

Reply by davidK/CA on 9/3/09 6:45pm
Msg #302833

Re: When you say crooks have you considered

Nothing in the paperwork spells out the terms of the $6,500 "prepayment reserve" such as under what circumstances they will get the money back, where the funds are being held, are the borrowers entitled to interest, and if so how is that to be calculated, etc.

It's there all by itself on the Estimated Settlement Statement, without any explanation. Considering that the borrowers are paying 35% down and that six months interest penalty on the full loan amount is a heck of a lot less than $6,500 I just wonder if someone is going to be screwed.

Hard loans don't have such interest rates and all the other fees are only slightly higher than most purchases I see lately, so what gives?

I'm not giving any advise to the borrowers for or against, I just think it's an odd item that I have never seen before, but I still wonder if this is a new trend.

Reply by Shoshana/AZ on 9/3/09 7:40pm
Msg #302835

Hard loans can even have higher rates. n/m

Reply by ReneeK_MI on 9/4/09 7:23am
Msg #302852

"prepayment reserve" totally different than PPP

I never heard of it either, but you just can't stump Google. The prepayment reserve is literally that - a reserve of loan payments made ahead, sort of along the lines of an escrow account. The borrower can then tap into that prepayment reserve if he needs to (say he has one month he's short, or perhaps a seasonal income). Looks like it's a pretty common thing in Europe, and actually I think it could make a lot of sense in some situations.

You would THINK it would be spelled out in the Note, or at least a Note Addendum - but perhaps it has it's own document with the terms.

Reply by davidK/CA on 9/4/09 11:11am
Msg #302881

Re: "prepayment reserve" totally different than PPP

It turns out that my horror was only slightly in excess about the "prepayment reserve".

The $6.500 was to be put into the Lender's bank in a separate bank account in the name of the Borrowers. From that account the Lender would withdraw the monthly mortgage payment amount and the Borrowers were then required "to refresh" the balance back to the $6,500 level within the ten day grace period for the monthly payment. The Borrowers were not to be allowed to access the funds, only the Lender was allowed to withdraw funds from the account. This $6,500 balance was to remain in the account for 15 years, the life of the loan.

So let's see: In addition to all the other fees and the variable interest rate the Borrowers are forced to lock away $6,500 for 15 years without any interest earnings. At 2% interest, (and ignoring compound interest) that's at least a $2,000 gift to the lender. Sure, they have a sum of money to help pay off the balloon payment caused by the deferred interest (the payment is fixed for 15 years and the amortization of the loan is for 25 years) but wouldn't it have been simpler to just add 1% to the loan fee?

Maybe I'm all wrong, but it seems abusive to me to require the Borrower to lock up a bunch of money at no interest for 15 years.

Reply by MistarellaFL on 9/4/09 3:32pm
Msg #302919

it seems abusive to me

Maybe not. It could have been their only alternative, dependent on their credit and their financial situation.
It looks like the lenders are at least looking into alternative measures to help people refi their primary residences. I am seeing a few ARMs again, too.
Right now I'll guess they are trying to avoid foreclosure or short sale.

Reply by davidK/CA on 9/4/09 5:43pm
Msg #302940

Re: it seems abusive to me

Their credit scores were in the 800's and the had enough money on hand to cover $100,000 down. The wife was sharp enough to point out that the daily interest rate on the Estimated Settlement Statement was calculated incorrectly and that there was a $2.00 difference in the calculated fixed payment.

I wanted to scream "This is not the normal way we doing things in America", but I didn't.

Perhaps as a middle-aged Asian immigrant couple buying their first house and doing business with an Asian ethnic bank they thought this "prepayment" was normal.