No Cost Mortgage Advertisers Prey On Unsophisticated Borrowers
Mortgage Insider » Mortgage » No Cost Mortgage Advertisers Prey On Unsophisticated Borrowers
No cost mortgage advertisers pound the air waves spewing this mortgage lie. The no cost mortgage is a scam requiring great salesmanship, some misdirection, and an unsophisticated client.
So I’ve been railing against the no cost or no fee mortgage advertisers for years now…both on my blog and formerly on our radio show. Calling these phony mortgage lenders out to debate their ridiculous ads. The ads that make it sounds like they do not charge a mortgage origination fee or any fees for that matter. They are just happy to do your mortgage for free. Hilarious.
These salesmen usually hide in their telemarketing boiler-rooms satisfied to work for a mortgage “sweatshop” preferring not to ask to many questions of the “higher-ups”.
No Cost Mortgage Salesman Defends His Practice!
He works for Lenox Financial at the National Office…we’ll call him Mr. H. Mr. H emailed me to defend his company’s practice of selling a no cost mortgage. In case you don’t know who Lenox Financial is…they are the folks whose annoying CEO with a pronounced southern drawl claims a no closing cost mortgage is “the biggest no brainer in the history of earth”. I wrote a Lenox Financial company review just click the link to read.
What you see below is the dialog between Mr. H and myself.
—–Original Message—–
From: Mr. H [mailto:MrH @ lenoxnational.com]
Sent: Tuesday, February 06, 2007 10:58 AM
To: rkblake @ themortgageinsider.net
Subject:Your information on no cost mortgages leaves out a very important fact. If you have a loan of 200,000 at 6.5% your payment will be $1264/month (p&i). Compare that to a traditional loan with closing costs of $5000, your new loan at 205,000 at 6% will have a payment of $1229/month. It’s critical you look at the break-even on closing costs. Pretty simple to divide $5000 by the $35 you save, to break-even in 143 payments. That’s almost 12 years! What happens if you are like the average mortgage holder who refinances every 2.8 years? You never broke even on the closing costs. Who is in the better position to refinance if the rates come down below 6% again with no closing costs? What happens if you have a trusted broker who watches the market for you and calls to refinance when the market improves?
Senior Loan Officer
Lenox National Mortgage————————————
Mr. H,
(A lot of what you’ll read are indictments of business decisions made way above your pay grade, so I’m not blaming you Mr. H. with my criticism. I never blame loan officers for the unethical behavior of the “higher ups”. Try to keep an open mind, and really ask yourself the questions below. I’ve got 15 years in this industry, and if you want to have the same, thinking for yourself is an attribute to cultivate.)
There a lot of things wrong with the way Lenox Financial and many other companies advertise the no cost mortgage refinance.
First, anyone who sells the no cost mortgage simultaneously sells a client into becoming a “serial refinancer” which is not looking out for the client. They are “churning” the client. It’s illegal in the investment world and it’s a violation of the broker/lender agreement in the mortgage world.
Even if it wasn’t unethical or a violation of contractual agreements, the current market with rates on the rise for a full 30 months now with no end in sight renders the whole idea moot. In all honesty, how many “watch the market and do it again” calls have you received from former clients in the last 30 months? None would be my guess. And you won’t be receiving any of those calls for years to come even if rates drop. Dropping rates would indicate recession fears and that is precipitated by home values dropping significantly. One can’t refinance out of their first no cost mortgage once their home goes “underwater”.
When the market rate in 1992 for a 30 year mortgage was 10% and eventually bottoming out at 5.125% in June 2003 ..the premise had potential. Where was Lenox in 1992, 1995, or even 2003? I didn’t hear any No Cost Mortgage radio spots in those years? So Lenox doesn’t market the idea of “serial refinancing” when it’s actually good for them. They wait until it’s bad for the mortgage consumer and then sell it like crazy?
Next, where did you get the figure of the average mortgage holder refinancing every 2.8 years? That’s a made up number to sell more no cost mortgage refinances. The average mortgage according to FNMA is held 5.7 years in the last decade down from 7 years in the previous one. The dropping average only happened because property values were climbing at unsustainable rates and folks were moving more often. Also dropping mortgage rates spurred legitimate refinancing helping to lower that average. Get real figures, not the spoon fed company line. Do a little research. Prove to yourself the are lying to you, and using you to lie to the customer.
My original article mentions the fact the radio ad verbiage is deceptive on it’s face. The phrase no cost mortgage is outlawed in California mortgage advertisements because it is so deceptive. Many folks in America as you know are astonishingly unsophisticated on financial topics, and no closing cost mortgage lenders are simply taking advantage of their financial ignorance to line their own pockets. That’s just wrong.
Lastly, I seriously doubt any company who sells the no cost mortgage is only bumping the rate from 6% to 6.5%. I’ve talked to many folks who’ve called your company and others with the same marketing message and the rate bump was closer to a full 1%….from say 6%-7%. Which pays massive mortgage yield spread premium. And when the client yelps at the ridiculous rate, no cost mortgage lenders harp on the fact “they waived” the costs. Your commercials don’t make it clear that there is a big cost for your mortgage….a much, much higher rate.
With all that said, if you are going to be a loan officer… then be one. Not just some easily duped, party-line spewing, company mouthpiece. Help people make real choices about the most important financial decision they’ll ever make. Give them the respect and the truth they deserve.
Rob K. Blake
(end of email)
——————————————
So folks there it is …an inside look into a no cost salesmans attitude!
Folks don’t be fodder for the national no cost mortgage lenderss.
Instead learn to locate an ethical, truth-telling mortgage broker in your home town using The Mortgage Advantage mortgage shopping system.
You’ll be glad you did.
Good Luck
Author: The Mortgage Insider
Date: January 8, 2007
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I came upon your post by way of googling no cost mortgages, which I’m looking into, given that I now regret having paid closing costs last spring to get a 5.75% loan. At the time I thought the market had bottomed out.
With two years of hindsight, I have to laugh at this:
“the current [Jan 2007] market with rates on the rise for a full 30 months now with no end in sight renders the whole idea moot. In all honesty, how many “watch the market and do it again” calls have you received from former clients in the last 30 months? None would be my guess. And you won’t be receiving any of those calls for years to come even if rates drop.”
In the 2 years since you posted this, rates have twice dropped below the “historical” low of 2003. I’m guessing many of those no cost refinancers have “watched the market and done it again.” I’m certainly not going to gamble closing costs this time around on my belief that I can time the bottom of the market. If I can pay nothing except a bit of time to lower my rate from where it is now, that’s enough, even if i miss the absolute bottom.
I give you credit for noting that a rate drop would be associated with a tumbling housing market. But despite the current sad economic picture, there are still many of us who bought 10+ years ago, are not YET “underwater” (or unemployed) and may as well lower our rates for free while we still can.
Resa,
You still may not be getting the point of the article…so I’ll repeat it here.
“There is no such thing as a “no cost” mortgage”. Borrowers pay the costs either as one-time fees or as a higher than market rate.” “Free mortgages” do not exist. Only trade-offs exists…and those trade-offs are always how are borrowers going to decide to pay their closing costs…they are never between the lender paying the costs or the borrower. That is a false message that “no cost” advertisers want to erroneously put in borrowers’ heads.
The reason I draw this conclusion is your statement of “I now regret having paid closing costs to get 5.75%”. If you truly understood the relationship, you’d know had you NOT paid the costs, you’d be paying on a rate around 6.25%…and that costs a lot of money too.
With the Fed Funds rate at virtually zero, this would truly be the time to pay the costs and actually acquire “the bottom” in the 30 mortgage rate market. (You could then recoup the costs, by prepaying a few mortgage payments…depriving the lender of the interest associated with those prepaid payments. I outline the strategy with our custom mortgage calculator here.) So once again, from your words above, it’s clear you are simply not understanding the relationship of higher rate vs. one time costs.
Thanks for noting my proviso for the majority of homeowners who, unlike you, didn’t have enough equity to refinance away from the “no cost” loan they got hoodwinked into taking. Consider yourself extremely fortunate you still have equity and income you can prove.
Do yourself a huge favor and wipe the marketing message of “a free mortgage” the “no cost” mortgage advertisers want you to internalize out of your mind.
It does not exist.
My wife and I are victims of Bank of America’s No Fee Mortgage Plus. We were led to believe that we were saving over $6000 of closing costs. Our bank rep (who has not returned any of calls since our initial signing) mislead us to this trap.
In fact, BOFA did not pay for all the closing costs. We were classic victims of their fine print. If you feel that we have a case against BOFA, please let me know via email pmendoza39@yahoo.com.
Here’s a quick scenario of their shady business practices and lousy service…
Wednesday, April 9, 2008 – my wife calls BOFA to ensure that our property is appraised before our final date of backing out of the offer on 4/10/08. BOFA gives us their OK to proceed.
Friday, April 18, 2008 – With a declining California market, BOFA again appraises the home and let’s us know that an additional 5% is needed, since the market value has dropped. Our closing date was April 22nd.
*this was written on their addendum (which was signed). However never explained to us by our missing rep. and at the time, 2 days to come up with the additional 5%.
Present – we extended our closing date to Monday, 4/28 but a cashiers check is needed 2 days before. Which gives us 5 days to come up with the $17,500.
Why did we proceed with this? Well we had put a $10,000 good faith deposit to our escrow company (who did not want to extend our loan) and did not want to lose it. If escrow allowed us to extend, we would have gone through another lender.
If you are a victim of this and have any suggestions at this point, please contact me. We are planning to take action one way or another.
Thanks,
Phil Mendoza
818.915.5256
David,
I wrote a big post on COFI loans check it out below…
http://themortgageinsider.net/mortgages-refinancing/california-refinance-decision/
RKB
what is truth behind cofi loans? i’ve been doing some research and can not find anything that will give an example of how they work.
Thanks a ton!
Brednan,
I’ve been watching the market today…and in the last 3 hours wholesale lenders have increased rates 3 TIMES!
The most I’ve ever seen…so the bottom was hit…at bounced off very quickly today.
If you didn’t already lock in a rate…I’m afraid tomorrow will be too late.
But as I told Jerome above…if you are refinancing to get out of an ARM, do it now as home values are dropping. If you don’t you could get stuck in your existing loan for the long haul.
Rob
Hey guys, quick question. I am in the process of refinancing. Should I wait because mortgage rates should be falling soon or are rates as good as they’re gonna get?