I believe in motherhood and apple pie too. But in the real world I’d be happier if we could settle for the *lender* understanding the loan and the risk they have.

The critical point is, a borrower should always understand the loan they have, the risk involved, and be able to manage their finances to their benefit. Very few mortgage brokers or loan officers are financial planners, or consider the broader needs of their clients. Many people lack appropriate understanding of mortgages, and may be susceptible to pressure sales tactics.

Here’s why I disagree with Appleton-Young:
Say a Boomer, nearing retirement, who’s been in their Bay Area house for 20 years, is in an 800K house, and has 60% equity. Say, like many of them, they don’t have a ton of savings in 401K, IRAs, and no company pension. Using an Option ARM, and making minimum payments to free monthly cashflow for investment, understanding they have negative amortization, but accepting this as a reasonable way to leverage their equity, can be a good way to improve their financial security.

On the other hand, a GenX/GenY buyer, who uses an Option ARM as part of a 90 or 100% financing deal, and was qualified by a lender only on their ability to make the minimum payment, not the fully amortized payment, is taking on a LOT of risk, since they don’t have equity to leverage (therefore very little buffer to potential depreciation, or slower than expected appreciation), and may face the payment shock scenario if/when the loan reaches a re-cast point, which is at 110% of the original loan amount for many lenders. That can come much faster than expected — if it’s expected at all — depending on the terms of the loan.

“If a borrower is interested in No Interest loans, negative amortization loans, even adjustable rate financing with a low down payment, Make sure you refer that buyer to at least 3 different mortgage brokers, and steer them away from brokers that you know use creative techniques in order to bolster income and assets in order to qualify for financing.”

— David Parker, Parker & Crosland, LLP, C.A.R. Strategic Defense Attorney

And here it is on video — http://media.car.org/videos/CARexpo_Legal.wmv — Starting at 2:45 on this 3:22 minute video clip on legal issues facing Realtors.

That’s a very good point.

Or as the NRA (National Refi Association) would say: “Option ARMs don’t kill people – people kill people.”

Option ARMs can, and have, been misused and abused by under-informed and/or poorly trained consumers and brokers. That doesn’t make the loan itself ill-conceived or bad, but how it’s applied can be.