Pre-Payment Penalties and ARMs

ACORN Financial Justice Personal Writings

Orange County        My father was born and raised in Orange County.  My grandfather had been a foreman on an orange ranch.  Every five years, just like clockwork, my dad would sign up for 2 weeks of vacation and our family would drive for almost 3 days across the country to visit what my brother and I referred to as “OUR GRANDPARENTS FROM CALIFORNIA.”  In our youth we had a double set, and they were distinguished mainly by geography:  GRANPARENTS FROM MISSISSIPPI and GRANDPARENTS FROM CALIFORNIA.  Since we never lived anywhere close to our grandparents their regional ID tags reflected the exotic way that we saw our visits to the Mississippi Delta or the southern California beaches. 

Anyway I remember when Orange County actually had orange groves.  My uncle and aunt lived on one several of those trips until one trip it had become a subdivision. 

We remember the stories of my dad riding his bike over the hills of Orange or Santa Anna, throwing a paper route or helping with the smudge pots when freeze threatened. 

What they raise in Orange County now is the interest rates and fees on mortgages.  This has become the national home it seems of the sub-prime mortgage industry with one headquarters after another located now in Orange.  For two days I was part of a team of staff and leaders that made the rounds among some of the biggies to continue long discussions worth millions, if not billions of dollars, to our members.  In a quick trifecta we hit New Century, Option One, and Ameriquest on this road trip.  In each case we met with the very top leaders of the companies which reflects both the stakes of these conversations and the respect of the parties.

I can’t write about most of this.  These are sensitive market and industry shaping conversations.  There are some sharp elbows and some sweet nothings combining to see how far we can all get in moving the mountains to a better place for our members and consumers in general.

The more I talked, and especially listened, to Jordan Ash, director of ACORN’s Financial Justice Center, and Bruce Dorpalen, long time strategist for our housing counseling programs administered by our housing arm, the ACORN Housing Corporation (who celebrated his 31st year on the 1st day of this trip — congratulations and THANKS, Bruce!), discuss the industry practice of charging pre-payment penalties (unknown in the prime mortgage market but pretty standard among these sub-primes) and ARMs (adjustable rate mortgages) increasingly as the norm, it just got be more riled up because it felt so clearly predatory.   It violated what we used to call in Arkansas the “do right rule” after a famous incident involving one-time journeyman coach Lou Holtz, when he ran the Arkansas Razorback football team many years gone by.  It just felt wrong.

ARMS now run about 75-80% of the loans many of these companies are making.  What that means is that in the first couple 2 or 3 years, a homebuyer might pay interest only or a reasonable or “teaser” interest rate, but then after that period the hammer comes down and the rate ladders up.  The sub-prime lender assumes in many cases that the homebuyer will then refinance the mortgage.  The two teams of negotiators called these 228 loans — 2 years low and 28 high in effect on a 30 year term of the loan.

Since the average time in one of these mortgage is only 2 years for sub-prime loans, a hidden, undisclosed but virtually predictable cost to the poor homebuyer is that when they are forced to the wall to pay the escalating rate, and either sell or refinance, then the company will get another nice infusion of cash when the consumer pays the pre-payment penalty for settling the full mortgage early.

Don’t forget that at each step of the way, both going into the loan and coming out to refi, the customer will be paying fees, points, and god knows what else worth thousands!

Legally or illegal, this just has to stop — it’s doing nothing but enriching these companies and their brokers at the expense of the working stiff trying to put a roof over the heads of their families!

What a rip!

June 30, 2006

Orange County