An Open Letter to Tom Brown at BankStocks.com

... all of this is moot if you just watch their own training video. In it, you can see very clearly how World Savings trained its brokers to obscure the true nature of their product. When the actor role-playing a loan applicant asks clearly if picking a minimum payment would cause the loan’s balance to grow—the key feature of negatively amortizing option ARMs as I’m sure you’d agree—the actor role-playing the loan officer dodges the question: “It’s optional,” he says. The answer, of course, is yes!

By the way, it’s worth noting that World Saving’s option ARMs were the most toxic brand available. The typical option ARM allows negative amortization to grow for five years or until the loan balance reaches 115% of its original amount. But the Sandlers’ option ARMs allow the loan balance to grow for 10 years or to 125% of the original amount. As I’ve said before on my blog, in allowing negatively amortizing minimum payments, option ARM lenders effectively gave borrowers rope to hang themselves with. Understood this way, World Savings was giving its borrowers a noose tied to the end of a bungee cord…