I got an email from a lady that retired last year. She bought the condo she's living in with a Payment Option ARM. Trouble was, she really didn't know it was "one of those" loans. And she's been around the block a few times and had purchased at least four other properties throughout her adult life. But now the loan balance had reached 115 percent of her original loan due to negative amortization and her new house payment was higher than her monthly income.

Her debt ratio was something like 135. That means her house payments including taxes and HOA fees were 135 percent of her gross monthly income. Gross monthly income, as in before withholdings. Her savings were dwindling fast.

She asked if there were anything she could do to get the payments back down to where she could afford them and unfortunately I told her that there wasn't anything she could do -- unless she could show that she never signed an "Adjustable Note Rider" or "Payment Option ARM Disclosure" or claimed outright fraud by the mortgage broker.

She couldn't recall signing anything so I told her to go back and look again because a lender won't draw closing papers on one of those loans without that signed document in the file. The next day she called and said, "Yes, I signed one."

She just thought she was getting a great deal on an interest rate and could pay back the principal anytime she wanted. Was she swindled? Maybe. It's also likely the loan officer didn't know what in the world he was talking about only that the monthly payments were so much lower than a fully amortized one. Who can resist that?

It's easy to sell monthly payments. Much harder to explain to a consumer how a contract rate can negatively amortize a mortgage loan leading to a fully indexed payment becoming due upon the 13th month of loan inception if the unpaid principal balance exceeds 115 percent of the original note.

Did you hear that? I said it was much harder to explain to a consumer how a contract rate can negatively amortize a mortgage loan leading to a fully indexed payment becoming due upon the 13th month since loan inception if the unpaid principal balance exceeds 115 percent of the original note.

Okay, now hold the phone.

How many times a day do you hear a radio commercial or see a TV. ad or an online pop-up say, "Cut your monthly payments in half! Call Now!"

Do they say how? No. They explain that, with scripted voices on the other end, how easy it is to qualify and "wouldn't you like to have some extra cash in your pocket Mrs. Consumer" or some other salesman-like tripe.

And just who are these lenders? They're national lenders. They're mortgage bankers. And they push those loans 24/7.

Okay, now go back to the phone.

Why can't loan disclosures be just as simple as, "Cut your monthly payments in half!?"

Why can't loan disclosures say, "You can pay this much every month, but if you don't pay this much every month it gets added back to your loan. If your loan goes to this much then your new payments will be this much. If you can't make those payments we can foreclose on you."

Do you hear that anywhere? No. You read disclosures that will put speed-freaks to sleep. I know lenders are trying to cover themselves and those disclosures are written by a bunch of lawyers but really, who understands all of those? Especially since you're signing, what, a hundred pieces of paper at closing?

I say if you're a lender and you're going to have such a complicated loan offering that even the loan officers pushing those loans can't explain them, then something's wrong. Put it in plain English or don't push the product.

And by the way -- that same lender on the radio who wants you to take a payment option arm to cut your payments in half also runs another ad telling you what an idiot you are if you have an adjustable rate mortgage so it's time to get a fixed rate.

I guess that's after you take their idiotic payment option arm.

Sheesh!

Published: September 7, 2007

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, a veteran Mortgage Banker, successful Real Estate Consultant and author of Your Guide to VA Loans, Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan, Who Says You Can't Buy a Home!, and Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You, is a former columnist and Contributing Editor with San Diego-based Mortgage Originator Magazine. Reed is President of CD Reed Mortgage Bankers, Austin, TX and is a Past President of the Austin Mortgage Bankers Association.