SHADY SWITCHEROOS AND SCAMS:

MORTGAGE TRICKERY TO AVOID

Brian Diez, a former military man, entered the mortgage business after a career as a stockbroker, in part figuring he would like the opportunity to help families buy their first homes. He learned quickly, however, that not all mortgage brokers have their clients' best interests at heart.

"What became clear to me is every company was really interested in selling as many loans as they can, and not really helping clients," says Mr. Diez, sales manager for First Class Equities in Oceanside, N.Y. His quest to inform consumers prompted him to create a blog on the topic, http://briandiez.blogspot.com.

The "dirty tricks" he has seen and heard of range from brokers steering clients into products clearly unsuitable for them to shady switcheroos at the closing table.

Consumers can protect themselves by doing some research online before talking to a mortage broker or banker, to have an idea of their mortgage options, Mr. Diez says. They should also request copies of and review their credit reports to know what their credit looks like before the discussion begins.

You may never find that altruistic mortgage lender: It's rare when commission-earning individuals -- whether selling mortgages, stocks or automobiles -- can completely divorce their self interests from a sale, says Joseph Badal, senior executive vice president at Santa Fe, N.M.-based Thornburg Mortgage.

But there are ways you can shop more wisely for a mortgage so you won't get fooled by salespeople who are more concerned about commissions than clients:

Beware of products that seem too good to be true. Watch out for low-payment advertisements, says Kate Crawford, chairwoman for the consumer protection committee of the National Association of Mortgage Brokers.

"What it is, it's a teaser ad...that could lead to negative amortization," she says. In a negative amortizing loan, borrowers aren't paying the full amount of interest accrued each month and the unpaid amount gets added to the principal, thus increasing the balance. Homeowners with this type of loan can find themselves owing more than they bought the house for -- something especially important to remember in a softening housing market.

Although certain exotic loans make sense for some borrowers, they're not for everyone, Mr. Badal says. To find the best rates and terms, compare estimates from a few lenders, he adds.

Ask about prepayment penalties. Mortgages with prepayment penalties are those which charge a borrower fees for paying off the entire mortgage or a large portion of the principal during a certain period of time. Penalties can also apply should the borrower choose to refinance.

Terms of the penalties can be found in the Truth in Lending statement given to borrowers. But if the loan has a penalty for prepayment, it may be best to keep shopping. "There are so many [loans] out there that don't have them," Mr. Diez says. "There's no need to put a client into a mortgage that has a prepayment penalty."

Don't cave to pressure, and protect your identity. If terms change at the closing table, don't sign the contract, Ms. Crawford says. "A borrower can walk away at any time. That's their right," she says. And never sign a contract stating an origination fee must be paid if the loan isn't closed, she adds.

She also recommends following common-sense measures: Don't ever sign a blank form, and get a copy of every paper that is signed. Don't give out a Social Security number before it's time to actually apply. For paperwork bank statements and paycheck stubs that a lender might require, make a copy and always keep the original.

And while at your lender's office, take a glance around to see how paperwork is handled -- it may be one indication of how careful a company is with sensitive information, Ms. Crawford says.

-- January 04, 2007

By Amy Hoak

From MarketWatch