- The Washington Times - Wednesday, March 14, 2007

I receive a lot of mortgage solicitation letters, as I’m sure many of you do. Unfortunately, most of them I see are misleading.

This week I received one that was so far-fetched I’m compelled to share.

Here are some excerpts of the letter, and I quote:

• “30-year fixed, 1.95 percent.” These were big, bold letters at the top of the letter.

• “Our rate reduction loans can provide you with a 30-year fixed rate of 1.95 percent.”

• “… you can save \$1,764 every month …”

• “My company believes that honesty … is the only way to develop life-long mortgage customers.”

Turning to the back of the letter, I read the fine print, and I quote:

m “Initial Annual Percentage Rate (APR) for a 30-year mortgage loan with 80 percent loan-to-value is 4.981 percent. Rate is fixed for 12 months and adjusts upwards 7.5 percent of the payment amount annually for the first 10 years of the loan.”

Are you confused yet?

The letter twice touts a 30-year fixed rate of 1.95 percent, but the fine print estimates the initial APR at 4.981 percent and reveals that the rate is only fixed for the first 12 months, adjusting “upwards 7.5 percent of the payment amount annually… .”

Suddenly it doesn’t sound like a fixed rate anymore.

I decide to make a call to the fellow who signed the letter. I ask for him by name and I’m told he’s at lunch. The guy on the phone offers assistance. So I tell him that I received this letter and I’m fairly knowledgeable about mortgages but confused by the letter.

I ask if the 1.95 percent represents a payment rate, not the actual interest rate. The fellow confirms the 1.95 percent is the payment rate.

I ask him why this very important fact isn’t disclosed in the letter. He says he doesn’t know.

I ask him what the actual interest rate is. He tells me he’s not sure but something close to 7.50 percent.

Now we’re getting somewhere.

I ask him if the actual interest rate is fixed for 30 years. He says he’s not sure and suggests that he get my number so the fellow who signed the letter can call me back.

Half an hour later I receive a call from the letter writer. He confirms that the 1.95 percent is, indeed, a payment rate, not the interest rate. But then he says that if my credit good, the actual interest rate would be closer to 6.50 percent, but he’s not sure.

I politely suggest to him that the letter is quite misleading. Wouldn’t an unsuspecting consumer assume that the actual interest rate is 1.95 percent? He tells me that consumers are savvy enough to know that the 1.95 percent is a payment rate, not an interest rate.

Really? That’s not an assumption that I would make.

It then gets downright absurd. He acknowledges that the letter can be confusing and maybe a little bit misleading but tells me the language in the letter is required by federal law — I think he said the Federal Trade Commission.

That’s a good one. The government made me do it.

Now it’s time for me to explain this loan to the readers. The actual interest rate could be fixed for 30 years, but probably not. The actual initial interest rate is probably higher than 6 percent.

The 1.95 percent figure actually is how the minimum payment is calculated. For example, on a \$300,000 loan, the minimum payment would be calculated as if the interest rate is 1.95 percent. This would make the minimum payment \$1,101.

But if the actual interest rate on a \$300,000 loan is 6.50 percent, for example, the monthly interest is equal to \$1,625, making the minimum payment \$524 less than the interest charged.

The borrower’s balance will increase every month. This is negative amortization.

So this guy is trying to convince me that this shell-game-of-a-letter is a product of federal regulators. The letter’s words are plain: “a 30-year fixed rate of 1.95 percent.” Nowhere does the letter mention a payment rate. Nowhere does it mention that making the minimum payment will result in an ever-increasing mortgage balance. And these clowns boast about being honest.

Unbelievable. I’ve said it many times before: If it sounds too good to be true, it probably is.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail ([email protected]pmcmortgage.com).