Loans Answers

Variable rate forclosures – Duh

Question: Are lenders stupid?

They loan money to a family to buy a house.

The family has bad credit, so the lender makes them get a variable rate mortgage.

The family can barely afford the payments with this loan.

Later interest rates go up and the family can’t afford the new higher payments. The lender forecloses on the house and wonders why this is happening to so many of their variable rate loans.

Duh!

I would think that before loaning anyone money at a variable rate, the lender would be sure the borrower would be able to make the payments for however high the interest rates might go up in the future.

And that if a family can barely make the payments with current interest rates, the lender would *insist* on a fixed rate mortgage or no deal.

Is this common sense or what?

Answer: The people who set up the loans don’t care squat if people can pay because once they are done with the loan they get their fees and they sell it to someone else. As long as not too many of the loans fail (and can be traced back to them) they rake in the $$$ with no risk. Sweet deal for them!

Also, I was at a closing where basically the lender pulled a bait and switch and I suspect this isn’t uncommon. I felt sorry for the buyers. The lender basically told them that “sorry, you didn’t qualify for that loan we told you you could get (you didn’t get it in writing, right? good) but we have this incredibly complicated one over here that is just as good and it’s too bad it’s so complicated you’ll never be able to understand it in the 5 minutes you have to decide but I assure you it’ll be OK.”. There’s a lot of pressure on the buyer to just take it and go. A couple years later they had to sell the house when the balloon kicked in and they could no longer afford the payments.

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Filed under: Bad Credit Loan