By Rosie Rains
In The Little Black Book of Mortgage Secrets, mortgage
professional Rosie Rains details ways the common home loan can actually be a positive element in personal finances. Inspired as a mortgage broker by her clients’ appetite for straight-forward knowledge in the recent tumultuous credit market, Rosie has written a practical guide which is destined to become the bible for obtaining a solid mortgage for years to come. In lively, highly readable prose, Mortgage Secrets clearly lays out the answers to some of the most difficult and confusing questions borrowers face when obtaining a mortgage. Her passion is to help her readers to build wealth with real estate. Rosie devotes the core of her book to “real stuff” advice that will help consumers keep money in their pockets instead of someone else’s. It’s simply a must have.
Chapter 1: Are You Sure You Don’t Have a Problem?
I could tell that Zachary Horne was headed for a crash. A no-longer-young Hollywood hotshot who worked in talent management, Zak came to me because he had heard that I was the go-to girl for mortgages—especially problem mortgages. And because problem mortgages have become a biblical plague out there, I’ve been real busy. But I fit Zak in.
At a peak in the real estate market in California, Zak Horne had bought a three-bedroom Hollywood Hills home. He couldn’t quite afford one with a view of the sparkling lights of downtown Los Angeles, or, for that matter, the Valley. His was on the back side of the Hills, above Hollywood Reservoir.
If you cocked your head just right and peered through the living room bay window—and Zak always insisted that his guests do this—you could see Madonna’s old mansion, the one that used to have the garish burgundy stripes on the turret, the one she unloaded when she decided that merry old London was the place for her.
Since he purchased the home, Zak had refinanced. Twice. The talent management business is something of a roller coaster, and Zak had a tendency to run his finances as though he was always at the very top—the place on the roller coaster just before the screams begin.
“Rosie, you’ve got to help me,” he said, spilling out the contents of a legal folder (marked, I noticed, with a series of “jackpot” dollar signs). The folder contained his latest refinance paperwork.
He chattered about his star clients while I assessed his situation. He had a nervous amphetamine edge, and a goatee that he dyed jet black. My first piece of advice to him: lose the goatee.
Well, no. I didn’t really tell him that. But a quick look at the contents of his folder made me realize that he should draw wings on those jackpot dollar signs of his, since the terms of his mortgage meant that his wealth was flying out the window.
His lender had set him up with what it called a “personally tailored mortgage.”Yeah, right. This tailor had left a lot of loose threads. The program gave Zak Horne the power to vary his monthly payment amount. He could make a minimum payment, an interest-only payment, or a larger payment that would amortize the loan on a 30-year or 15-year schedule.
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Reprinted with permission from McGraw-Hill
So what did Zak on the Hollywood Hills roller coaster do? Except for a single the-road-to-hell-is-paved-with good-intentions first payment, Zak always, always paid the minimum. This meant that he was into negative amortization, two words that ought to strike terror into the hearts of both lenders and government regulators, since they helped lead us into a mortgage crisis.
What Zak was doing was borrowing more money, under the terms of his loan, to finance the shortfall of his payments. He was digging himself deeper into a hole. Over the 1.5 year course of his latest refinance, he had added $11,233 to his already hefty debt.
When Zak came into my office, I asked him a series of simple questions—questions so basic, in fact, that every borrower with an adjustable-rate mortgage, or ARM, should know the answer to all of them.
“Which index is your rate tied to?” I asked.
“The prime,” Zak said confidently. That didn’t sound right to me; usually only home equity lines and commercial mortgages are pegged to the prime interest rate. I glanced at his loan papers. The index that determined the interest rate on Zak’s loan turned out to be not the prime but the LIBOR, or London Interbank Offered Rate, a much more common index.
“What’s your margin?” I asked Zak next. This time he didn’t even try to hazard a guess. He just looked at me helplessly. Another piece of basic financial understanding was missing from Zak’s knowledge. Index plus margin equals interest rate. To put it in the terms of the loan document I had before me: Index (in Zak’s case, the LIBOR) plus margin (in his case, as I found as I sifted through his loan papers, 3.5 percent) would equal the interest rate Zak Horne was being charged, subject to his adjustment caps.
“What’s your cap? Your lifetime maximum rate?” The former dictated how fast Zak’s interest rate could rise at every reset, while the latter gave him a ceiling beyond which his rate could not go.
Again, Zak just shrugged helplessly. Out of the four very basic questions that every ARM holder should know, he was wrong on one and totally at sea on the other three.
“Look,” he told me, “I don’t care about any of the details. I’m not good with the small print. I’m a people person. All I want is to find out how much my payments are going to be.”
I did not say to Zak, the devil is in the details. I didn’t explain to him that by determining those four items—index, margin, adjustment cap, and lifetime maximum—he could have planned his financial future much more effectively. I simply rolled up my sleeves and went to work.
The story of Zak Horne is not a rare one or an anomaly. With the transformation in the mortgage lending industry, hundreds of thousands of people are finding themselves in similar situations, squeezed between monthly mortgage payments they can no longer afford and the impossibility of refinancing. Multiply Zak Horne by two or three hundred thousand and you have a credit crisis that is reverberating throughout the world, with screaming headlines in the business pages and billion-dollar bank write-downs from bad debts.
In the face of this crisis, we are all forced to ask ourselves some tough questions.
Has the mortgage bomb hit? Absolutely.
Are people going to lose their homes to foreclosure? Yes, some will.
Are property values tumbling like the commentators say they are? In some areas.
Will the credit market ever recover? Absolutely.
Is it the end of the world? No!
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Reprinted with permission from McGraw-Hill
There’s a widespread lack of understanding about what debt is, how to manage it, and how to use it to your benefit.
That’s where I come in. When people ask me what I do, I sometimes give them a flip, off-the-cuff answer. I say, “I dig people out of a hole or make sure they don’t fall into one in the first place.”
I ask all of my clients a basic question: is your mortgage contributing to your wealth? I like this concept so much that I had the phrase trademarked.
Wealth from a mortgage? This is a hard concept for many people to wrap their minds around.
“But, Rosie, how can a mortgage possibly help my bottom line?” one of my puzzled clients recently asked me. “It’s debt! That’s the opposite of wealth, isn’t it?”
She wasn’t the first one to voice that doubt. And the parade of clients who raise the question in exactly the same way has helped me to understand the widespread confusion over the recent fast-paced changes in the market. Consumer choices are proliferating. Loan officers pitch products such as the “option ARM,” “3–1, “5–1,” “7–1,” “one-month MTA,” “neg am,” and “advantage ARM.” The average mortgage shopper requires help in order not to get eaten alive by the big bad wolves.
Every bank, mortgage firm, and lending institution in the country needs a strong “borrower beware” message displayed prominently in its offices. James Agee’s well-known warning about playing poker is relevant: “If you look around the poker table, and you don’t see a sucker, then you’re the sucker.” The same could be said of the table at all too many mortgage closings.
So in this book you will hear my story, that of a minister’s daughter from a lower rung of the economic ladder who worked her way up to wealth. My client list consists of wealthy executives from the entertainment industry— actors, celebrities, and directors—as well as single nurses, retirees, and the plain old upside-down desperate. Using interesting case studies, anecdotes, and stories, I’ll help you draw conclusions about your own financial situation.
I will also divulge the secrets I’ve learned along the way. I will introduce different types of borrowers and outline strategies for each of them. I will lay out the pros and cons of using a mortgage broker or dealing directly with lenders. And I will explain mortgage products in easily understandable terms.
I know I can do all this well, in ways that can help you avoid the pitfalls and capitalize on opportunities, because that’s what I’ve been doing for my clients for years.
Zak Horne is one side of the mortgage coin. But perhaps you believe he is a special case and not one from which we can draw general conclusions. So let’s have a look at the other side of the coin, shall we?
To learn more about maneuvering through the mortgage market or to purchase my book, go to www.rosierains.com
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Reprinted with permission from McGraw-Hill