Did you know most of the foreclosures taking place now could have been avoided? With all the foreclosures taking place because of adjustable rate mortgages (ARM's), this could have been avoided if the lender had put families in a 30yr fixed mortgage. During the real estate boom, individuals that had less than perfect credit were put into sub-prime loans. There were millions of families put into sub-prime loans that had the qualifications to go FHA, which is a 30 yr fixed mortgage. The reason why was because there were many mortgage companies that did not have the necessary funds to get their license to originate FHA loans. So the mortgage company had no choice but to stick their client into a sub-prime ARM loan. Was this unethical, I would have to say yes. Also the mortgage companies that were sticking people in 2 year Sub prime loans sold everyone on 2 yr ARMs when they could have put them in a 30yr fixed sub-prime loan. Here is what took place.

2 year ARM sales pitch.

Here is what mortgage companies sold to potential borrowers. Sir or Mam you don't have the credit to go with a prime conventional loan but we can put you into a 2 yr ARM. With good credit history we can refinance you in 2 years into a 30 year fixed mortgage. This is what was being told all over the United States. Guess what? These people could have been put into a 30 year fixed sub prime mortgage as well. But the rate was lower on a 2 year ARM, and the lender made more money selling the ARM loan. Also the lender would get there business again two years down the road. So it was like machine during the real estate boom. This is the secret that lenders did not want you to know, and most of them never gave the option to the potential borrower.

The builder problem

During this boom the builders were doing more than selling 2 year ARMs, they were selling low payments. They would sell all these bogus incentives to use their mortgage company and along with the bad loan they were put into they sold them on low payments because of the un-improved taxes on the property. Yes there was this sneaky disclosure used to explain un-improved property taxes at closing, but they blew through it so quick the borrower never really understood it. Also the loan officer providing the loan never explained the repercussions of not collecting escrows for the mortgage. Most of the 2 year sub-prime borrowers with builders did not escrow their taxes and insurances. That is the other way they were sold on this whole process. During the excitement of this whole process, the borrower did not see the danger down the road. To talk a little about un-improved property taxes, here is how that nightmare works. When you buy a property, the taxes on the property if it's a new build is usually based on the land only. That is why the taxes and along with you payment is so low. But guess what, you will have an escrow shortage in about a year. Which means your payment will go up around $300 to $400 dollars. This is part of the reason for the foreclosures as well. Builders pretty much do what ever they want due to a lack of good legislation.

2 year ARM is up

Your 2 year ARM is up, and you now have two problems. First you cannot refinance because you don't have the credit. Second your property value has declined and you don't have the equity to roll in closing costs which is required to do a refinance, unless you have the money to pay all your closing costs. Since you cannot refinance your payment jumps up around $400 dollars and now you cannot afford your home. This is what is going on all over the country.

This is a example of how greed is going to destroy our country. It's unfortunate that our lending industry took advantage of people. This is going to affect us for a while. If you found yourself in this situation, the best thing you can do is work on your credit, and make sure you pay everything on time.

Check your free credit score report often so you know where you stand credit wise.

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