What Will Mortgage Companies Think of Next?

I've got a bone to pick with the mortgage industry.  Not all companies engage in these type of practices, but enough do to leave a bad  taste in my mouth.  The reason is that I'm getting sick of hearing some of the less than reputable ways that they are earning their money.  We've seen interest only mortgages given to people who will never be able to pay the balloons, home equity loans that are providing capital for people to live way beyond their means, and now the "vacation mortgage".

This new type of scam promises to give people a free vacation from paying their mortgage, of course that's far from the truth here's a recent post by on Rain City Guide, by Jillayne Schlicke:

"I just heard a KIRO 710 AM radio ad from a mortgage company promoting their new product, a “vacation” mortgage.  “Do you need a vacation from your mortgage? That’s right we give you a 12 month vacation from making your mortgage payments! Imagine what you can do with the money you’ll save: pay off credit card debts, start a new business, or take a vacation.”  !!!!!!!??

I could only hear a few of the words at the end of the radio ad because there’s background music running alongside it. You know what I’m talking about: “prepaymentpenaltyapplies” or whatever the required disclaimer is on this loan type.

So I decided to call the company. “It’s a great day at X mortgage! How may I help you?”  I was transferred to a loan officer who first wanted my full name. I gave him only my first name and explained that I wanted to know more about this mortgage before I gave him my full name.  He said that before he could tell me about the vacation mortgage, he would first need to see if I qualify for it.

I insisted that no, I did not want to be pre-qualified for a mortgage, I just wanted more information about the vacation mortgage since there’s nothing on his company’s website that explains what a vacation mortgage is all about.

So I tried to guess at it. “You mean I don’t have to pay my mortgage payment for a year?” He said, “Actually we give you a credit.”  I tried again: “So if my payment is $2100 per month, you give me a $25,200. credit?”  “Well,” he said, “that depends. First I would need to prequalify you.”

AAAAAAA!  It’s not a credit if the homeowner still has to pay it back. They must have meant, the $25,200 is taken out of the equity on your home, your mortgage is paid 12 months in advance and that amount is added to the loan balance, then you repay it amortized over the life of the loan.

This just seems more like a bait and switch type of loan. But then, it wouldn’t be a great day at X mortgage company.

Rhonda, can you help me understand what these loan products are about? I don’t need a loan quote. Instead, I’d like to know if these loans carry higher rates and fees, if they come with a hard or soft prepayment penalty, and if the lender is taking the $25,200 from the homeowner’s equity up front.  Even so, I will bet that there’s a minimum credit score required as well as some equity such as 80% loan-to-value. I mean, if a homeowner wants to take equity out, why not do a straight cash-out refi, and set the money aside for a year and make regular, automatic deduction payments.

When will the mortgage and banking industry start taking the bull by the horns and outlaw these kinds of practices?

-Susan Martin, NYC Real Estate Coach and mortgage conservative.

The Psychology of Pricing: It's More Than Just Real Estate

Teri Karush Rogers wrote an interesting article in last months' NY Times entitled "The Psychology of Pricing" in which she writes about the "message that figures carry to buyers", "break points" and how and when to introduce "price cuts".  These strategies don't only apply to real estate of course but to many other businesses as well. 

But pricing strategies are often overlooked by companies and professionals, choosing instead to live in fear of raising prices, or just keeping them the same because it's easier.  The real estate industry does take them very seriously however, with executives at many NYC real estate companies like Halstead and Bellmarc teaching classes to agents on how to price properties.  In part because of the buyers who have unrealistic expectations about what their properties are really worth:

"Despite whispering advice like courtiers into the ear of a monarch, brokers say some sellers have delusions of grandeur, stemming from a failure to grasp that what they want for their home has nothing to do with what it’s worth.

“Most of the time a seller will start to talk about what they want, and I will say, ‘I don’t care — don’t tell me,’ ” said Andrew M. Phillips, a senior vice president of Halstead Property, who teaches classes on pricing to Halstead agents. “I will do my analysis and come back to you with quantitative information.”

Which leads me to wonder:  How might a strategy like this impact profitability in your business?

-Susan Martin, NYC Business and Real Estate Coach and pricing strategy fan.