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Assistant Attorney General Chris Barry-Smith: Sure. Not so long ago, the process of choosing
a mortgage loan was relatively simple. You might chose a national bank, you might go
to a local community bank, but in either event you have to chose a term – 15, 20, 30 years
– and while there were some adjustable rate products, you usually chose between an
adjustable rate product and a fixed rate product. That changed in the last decade because lenders
no longer made their money from the interest of a loan over 20 or 30 years, but instead
sold loans and packaged them to be resold to investors. The result that we saw was a
drive for volume, and what happens after the drive for volume by these lenders is they
invented ways of getting more and more people mortgage financing that previously might not
have qualified. And that resulted in what we view as exceeding risky products, sometimes
called “exotic loans,” that became much more popular from 2002 forward. And as you’ve
mentioned now that might not be the case anymore, because things have somewhat returned to normalcy,
and generally speaking, that’s a good thing.
Coakley: In other words, a lot of people were able
to get loans, pretty quickly, without doing their homework, but some of that is what has
creating the problem right now, and frankly for people who are now looking to get into
the market, I think our advice is that you have to be a little more careful. Let’s
just talk briefly about those adjustable rate mortgages, or those ARMs. Can you just explain
what they are, and how they contributed to those problems in the past?
Barry-Smith: Sure. Our office experience indicated that
they were a major driver of what we’re now seeing in the foreclosure crisis. Generally
speaking, in the old days banks would look for borrowers to spend 30 percent, maybe 35
percent, of their income on their housing expenses, their mortgage loan. And what changed
was that that number increased dramatically, up to 45, 50 percent of one’s income dedicated
to home expenses, but then the lenders also often found a way to often keep the payment
low for a time period, usually 2 or 3 years, through a fixed rate that then turned into
an adjustable rate that caused the monthly payment to increase predictably, sometime
by 20, 30 percent or more. And that results in what we call “payment shock,” where
the loan products led to a payment shock that homes that were affordable for a short term
were no longer affordable. And it’s those products that I think are now off the market,
both because of both state and federal regulations, but also because that business model essentially
failed because so many of those loans ended up failing.
Coakley: Well, and if you had a loan that was going
to go up after 2 or 3 years but you thought you could refinance, that option was gone
once the market changed and house prices leveled out or, in fact, dropped. And so as we look
at what a homeowners needs to be careful about today, I think one of the warnings is: you
need to do your work so you know what kind of product you can afford or would it be any
good for you. Michelle, can you talk about – let’s say, you’re about to get into
the market – may be a good time to do it – what are the things a first time homeowner
has to think about, should think about before they even start visiting homes or looking
for products themselves?
Michelle Meiser: I think it’s really important to understand
the full process, to really understand where to start and then where to end, and all the
steps in between. And part of getting that information – there are resources for home-buying
classes, where you can find out about how the process works, but also about what lenders
are looking for, and what kind of mortgage products are available to you.
Coakley: Now this may be a new concept for people,
that you have to go to school in order to buy a home. But why is it – tell us why
it’s so important that people really take the time to understand their own situation,
but also what they should be doing to make this big investment.
Meiser: This can be one of the biggest purchases someone
makes in their lifetime and coming to a class gives you an opportunity to find out the process
and ask all the questions, so you can fully understand not only what you’re getting
into, but what you really want to put forward for you mortgage, how much do you really want
to pay, how much will that lender lend you, what should your credit look like, what are
your options. Without that class, you may have a harder time figuring out exactly what
your options are.
Coakley: And it’s really about making good choices
and having the basis to do it. We’ve seen what’s happened when the process has been
sped up, when people went into it too quickly – it really is a huge investment. Where
can people go to find a class? What are some of the resources available to let them know
where they might go?
Meiser: There are classes all across the state. I
would recommend that people look at the website for the Citizens Planning and Housing Association,
and that would be www.chapa.org. You can find them at your local towns – the city of Boston
holds classes; my organization, Allston-Brighton CDC teaches the classes, so there may be classes
in your own neighborhood.
Coakley: And folks can go to our website, www.mass.gov/ago,
and get links to some of those resources, or call – but we really urge that people
do this. What’s the time commitment? How do these classes take place, over what period
of time?
Meiser: The classes typically are 8 to 12 hours, depending
on whose teaching the class, and they may happen over the course of two days, or four
evenings.
Coakley: And how about fees for those? Are they available?
Is there a tuition cost involved?
Meiser: There may be a small fee, depending on the
organization, and a typical fee could be $35 for the cost of the class, and this typically
is what covers materials, producing materials for your benefit.
Coakley: But considering the kind of investments people
are looking to make, that’s a pretty good investment for that, and you’d avoid a lot
of problems down the road. And what kinds of – can you give us an example of something
that might be focused on in some of the early classes for consumers?
Meiser: When you first join a class, two of the typical
things that start the class out are learning exactly what the lender is looking for, how
you need to get your finances in order, and then really focusing on savings, budget, credit
– where does your financial picture need to be in order to qualify for a good mortgage?
Coakley: Okay. And now, Chris, we’ve been to class,
we’re looking at this market where prices are lower and interest rates are good –
what are some of the concerns that a homeowner should think about in terms of buying products?
We mentioned ARMS, but can you just mention some of the options that people have, and
what they should think about in terms of buying mortgage products? We’re talking about products,
but we’re really talking about mortgage or financial products.
Barry-Smith: Sure. We’re talking about mortgage loans,
and I think that the starting point is, as Michelle mentioned, there’s no substitute
for determining what you’re budget is, how much you can afford to spend on your home,
and then, with that starting point, looking for the right product. Some of those things
that I mentioned earlier – the artificially low payments followed by an adjustable rate
or a higher payment – mostly are no longer available, so we’re returning – because
the companies aren’t selling them anymore because the companies themselves are out of
business – we’re returning to what I described at the outset. You may have a choice between
a fixed rate and an adjustable interest rate and you’ll have a choice as to the term,
but those decisions must be made with respect to what you can afford now, and what you can
anticipate you’ll be able to afford over the long-term. So the budgeting is a necessary
first step, and then your choices may not be as voluminous as they were a few years
ago, but that’s probably a good thing because all of the products now should be designed
for sustainability, not for refinancing in the short term.
Coakley: Right. We’re looking at the long-term success
of these loans, something we didn’t do. And so very quickly, because as our time has
gone by, as people are looking to get into this market, they need to do their homework,
go to class, figure out what their income or joint incomes are going to be, and then
what can a homeowner do, a prospective homeowner? What do they start to do?
Meiser: They look at their income, they look at their
debt, their credit, and they look at piecing together a really good real estate team, and
looking at high-quality professionals. You want to think about who your lender is, what
kind of mortgage are you looking for. You want to think about what type of real estate
agents you’re working with, and who is your attorney.
Coakley: So that team is really important – again,
along the lines of making sure you make good choices, you need to get the best advice,
and you need to think about what the price of the home is, but also what’s its location?
Do you have a small family, a growing family? All those concerns that will help you decide.
And then in this market, if you have the team, you may be able to negotiate a price that
makes sense for you also. Is that correct?
Barry-Smith: I think that’s right. And another thing
to is to focus on getting pre-approved from a mortgage lender before you start shopping
for properties, because you don’t want to get into the process and then find that you
don’t qualify for a mortgage loan and can’t afford the home.
Coakley: And, in fact, if you’re not pre-approved,
and you find the home you want, you may not be able to move quickly enough to get it,
is that correct?
Meiser: Correct.
Coakley: So fair to say, the bottom line is, just like
always, you have to go to school. You have to do your homework because this is such an
important decision people are making. And we urge folks to check our website or the
links from our website to make sure that they are able to make the right choice and the
right decision. Again, a good time for first-time homeowners,
but thank you. Unfortunately, our time is up. There’s a lot more we could talk about,
but I want to thank Chris and Michelle particularly for joining with me today. We could discuss
this for a long time, but for those of you at home, there is more information on our
website, www.mass.gov/ago, on these issues as well as others around the predatory lending
issues we discussed earlier, and we hope that we can be helpful to you in our office. You
can email us at AGO@state.ma.us, or call us at 617-727-8400. I particularly want to thank
Suffolk University for hosting us here in their downtown Boston studio, and of course
thank you for watching, and we’ll see you again soon.