Beware The COSI Loan...Next Subprime?
A: I had a conversation with an ex-New Century Financial employee (a now defunct sub prime lender) last week who is now working for a new mortgage lender and specializing in still sub prime and alt-a loans. While the sub prime mess wasn't news to me or him, I was concerned when he mentioned the words COSI & COFI. Word on the street is, mortgage companies are instructing their employees to promote these types of loans with rates as low as 1.75%; and which offer four options to the consumer. I myself once considered this type of loan product UNTIL I researched it on my own. Turned out, the mortgage lender was flat out lying to me on the phone when answering my questions. So, once again, buyer beware!
Before I go into defining what these two loan types are, you MUST understand that the COSI & COFI loans were designed for troubled lenders and offer options in how to pay monthly bills. Given the nature of the situation, lenders know that most homeowners will choose the MINIMUM PAYMENT OPTION which costs the lowest amount! By choosing this option, the loan will negatively amortize, deferring interest to the principal of the loan. In a nutshell, you will end up owing way more than the original loan when you go and resell your home!
Now, lets define what the COSI & COFI loans are.
COSI Loan - The Pick a Payment / Options Loan based on the Cost of Saving Index (COSI) is designed to give the borrower significant cash flow savings for the fist five years of homeownership. The Cost of Savings Index is the hardest to track but arguably the least volatile. The COSI index is the weighted average of the rates of interest paid on depository accounts held with World Savings. The index is calculated at the end of every month and then averaged with the previous 12 months creating a very stable index.
COFI Loan - The 11th District Cost of Funds Index reflects the average interest rate paid by the member banks and savings institutions located in Arizona, California and Nevada. The largest part of this index is based on savings accounts so it will move more slowly to market swings. The COFI has long been considered the most stable and popular of indices associated with the Options ARM.
I found a great article from a mortgage lender dissing this type of loan because of the dangers and abusive nature of the product. According to Mortgageforum.com:
The COSI loan described is a NEG AM or NEGATIVELY AMORTIZED LOAN. If you as a borrower decide to make the minimum or first payment option, your mortgage loan will NEGATIVELY AMORTIZE. This means your payment was low for a very scary reason. The payment was not enough to cover the interest charged on the loan and the difference gets added back to your mortgage loan balance.Now the tricky part. The first deferred interest payment of the MIN PAYMENT OPTION of the COSI loan is usually very low; adding not too much to your principal! However, this is what lenders want you to believe as the worst case scenario. Back to the article and this example.
Example: 300,000 COSI Loan
Minimum payment option (1.95%) - $1101.37
Interest Only Option - $1162.50
30 year fixed option - $1546.91
15 year fixed option - $2318.04
*By the nature of this loan and the targeted consumer it was designed for, most will choose the minimum payment option giving them the lowest monthly payments to be responsible for.
In the above example, $61.13 was added back to your 300,000.00 loan. True, for the first month payment, this isn't very much, but the misleading part of a NEG AM LOAN is that the lender wants you to think this is the worse case scenario every month. NOTHING COULD BE FURTHER FROM THE TRUTH! As your loan balance begins to inflate, YOU START PAYING INTEREST UPON INTEREST! This is a nice thing your credit card companies like to take advantage of!?! Also, as you see later in this post, THE INTEREST RATE IS VERY ADJUSTABLE. As the rate goes up, the 3 payment options go up. And that means more money added to the back of your loan!Confused? This is why you stay AWAY from this loan product and don't fall into the trap! As Mark from this article states, "...The problem is that COSI LOANS are marketed without a little hidden part". Problem is there are alot of little hidden parts. These types of loan products are tricky and dangerous because:
According to the guy I had that conversation with last week, his company is selling hundreds of COSI & COFI loans every day! And that is just one company's office! He clearly stated to me that the powers that be at his office are promoting this product now that subprime is in the mass media and ARM's & I/O ARM's have been targeted by the regulators and marked by the consumers. Few know about COSI or COFI loans making them an easy sell!
Trouble on the horizon if this trend turns out to be true nationwide and not just around our neck of the woods! Expect uneducated homeowners to wake up to a grim realty in the years to come that their home loans are much higher than they anticipated and may even be higher than what the home is worth. Rising principal and shrinking home values are NOT a good combo!
If it sounds too good to be true, it probably is! Time will tell how this scenario plays out!
I would love if any mortgage brokers out there could comment on this post and whether COSI loans are being sold at your lending institution!
Posted by drtomaso
Tue Jun 19th, 2007 01:32 PM
I am confused about how these differ from "traditional" non-traditional mortgage products. Is it just the index they track?
With these products, are you locked into a payment plan? ie: could you start out paying the 30 year fixed, then switch to interest only while you, for example, return to grad school, then switch back to a 30 or 15 year fixed upon graduation?
Posted by Noah
Tue Jun 19th, 2007 06:31 PM
Dr - Main difference is they follow different index's and are comprised of 4 payment options that the consumer chooses from. However, the types of consumers that reach out to these products are looking to rationalize or refinance and get the lowest rate possible, making the product an easy sell and trap.
Yes, you are locked into a payment plan when you sign up. Again, most who take this take the MIN payment option. There may be option to switch, I dont recall, but Im sure it costs a pretty penny in doing so. This product has plenty of fees to benefit the lender.
Posted by Jonny Q
Fri Jun 22nd, 2007 02:59 AM
What is the general interest payment on the other 3 payment options. You mentioned 1.95% for the minimum payment plan, but what about the others? (The interest only, 15 and 30 year fixed)?
Posted by Scott
Tue Jul 3rd, 2007 02:26 PM
As usual... this writer has given ONE SIDE to the story/product. If you frame it like this of course it looks horrible - but ethics and journalism seperated long before the mortgage market crashed so I am not surprised.
What the writer does not mention are the tremendous upsides to using the COSI Loan properly and allowing yourself in some cases a tremendous amount of cashflow at your disposal "IF YOU CHOOSE TO USE IT OR NEED IT"!!
One simple example - most buyers in the country select a 30yr fixed rate when they will likely leave the property in the first 5 - 7 years!! So those borrowers will pay the bank a lop sided amount of interest over those years without truly paying down any principle on the loan in that "safe fixed mortgage". How does that make any sense??
So - If you did get a COSI Loan and you were able to take a minimum payment "option"... let's say you set aside $4000.00 throughout the year which you would have been required to pay on your 30yr fixed mortgage - but you now have the cashflow due to the COSI... and you put that $4,000.00 into an IRA account and you do this for the first 4 years of your new COSI mortgage, ultimately deffering that $16,000 to the end of a mortgage. Are we clear still?? After the first 4 years, you have now taken $16,000.00 and added it to your pronciple balance while your home likely increased in value - but let's be devils advocate and say it doesn't - yes you have now increased your loan amount by $16,000.00. Another note - the average house hold keeps more then $15,000.00 in revolving and adjustable credit card debt every year. Also - after the first 3 years, at the cost of roughly $200 you can convert the COSI to a fixed rate if you chose to do so... of course the author failed to mention that also - hhhhmmm, shocking??
Moving along - If you did this for 4 years straight while your kids were in high school and working the summers before they went away to college... and you left that combined amount of $16K in the IRA untouched, those kids would have roughly $2.5MM of tax free money coming back to them when they turn 60 years old. Thanks mom and dad!!
So for the $16K you added to your mortgage balance, which you will likely cash out and re-fi numerous times anyway later - seems to have an upside to it that doesn't get much press.
So those who trash these products without being objective - you can thank them for not sharing the information I just did with you - and I'm sure your kids would be happy you listened to one side of a debate.
FREE YOUR MIND~
Posted by Noah
Tue Jul 3rd, 2007 04:29 PM
A few observations about the comment above, yes you Scott!
1. I wrote this post almost 2 1/2 weeks ago. Obviously you found it via google rather than by being a daily reader of my blog! So your comment starting with AS USUAL, is obviously bullshit! Read ALL My stuff before jumping to conclusions like this! I am very open minded in my posts which you have obviously not read.
2. The COSI loan is an easily misunderstood product that is an easy sell by mortgage lenders who target their customers to those who are troubled seeking the best deal possible to make payments easier. I for one physically was sold this product back in 2003 and LIED to by the lender even when asking them about the neg amortizing effect of the min payment option. The lender told me that it is not! 2 days later I tried to call back to confront him and he hung on me numerous times.
This post is a DIRECT result of a conversation I had with a lender who used to work for New Century. He is now with another firm who are selling these loans. He 'off the record' told me how they are trained to target troubled consumers who MUST lower their payments. Most choose the min payment option without fully understanding its neg amortizing effect.
3. You fail to mention tax benefits to writing off interest payments with a 30YR fixed, a substantial incentive to home ownership. You fail to mention the comfort in understanding the product you have as opposed to COSI. You also fail to mention how 16,000 will eventually turn into 2.5M! 16K in an IRA untouched for 40+ years and you have 2.5M..Geez, everyone should be rich by your thinking! Are you talking about the same America as I live in?
4. Those who turn to products like the COSI loan are in trouble making payments! They need to lower their monthly payments and therefore look to loan products like this. This is REALITY! Obviously far from the fantasy world you are describing in your comment above. If you want to talk reality, than know that troubled consumers who need to lower payments and are stuck against a wall, look to COSI loan or similar types of products - this being confirmed by the unnamed source that motivated me to write this.
Being a troubled consumer, you will be easily tricked into min payment option, you will NOT save that extra money that you keep talking about, and you WILL experience a RISE in your principal balance due to the lender. Many consumers do NOT understand what they are getting into with a loan like this! That is reality. That is real world. You trying to say Im biased or one sided doesn't apply to this statement! The cosi loan is NOT some magical product that no one knows about. It has alot of pitfalls.
You talk like you have a vested interest in supporting this product. And frankly, your so easy to do financial planning strategy you mention seems so out of touch to the consumers that look to this loan type.
Posted by anonymous
Fri Nov 9th, 2007 12:35 PM
Disclosure: I am not a regular reader of your blog and also arrived at this post via Google.
I'm looking for a mortgage now and I appreciate your catalog of the pitfalls asosciated with COSI loans. I'm wondering: if I only expect to stay in my condo for 5 years, though, all other problems aside, doesn't a COSI loan make sense?
Posted by Noah
Fri Nov 9th, 2007 02:14 PM
Anon - Is it negative amortizing? Most are! Beware the lies that many brokers tell you as I almost fell for it myself until I asked to speak top manager who confirmed it was negative amortizing loan, which the broker sweared it wasnt.
I wouldnt TOUCH this loan product. If you will have for 5 years, get a 5YR I/O loan, if you can anymore.
Posted by Kat
Fri Nov 9th, 2007 08:35 PM
I DISAGREE!!!
While doing my homework on the cosi loan I learned alot from it therefore i decided to refinanced last year to get the loan and because of this loan i have invested a large amount in many ways all due to the minimum payment that allows me to invest in other ways. Many of us who do get the cosi loan get it to save money and invest so that we can retire happily. With a regular job, 30yr mtg, Bills and everything else seriously how much can we save ? NOTHING!.... This loan works if you make it happend!! You might be right when you talk about hidden information thats kept from the client on all types of loans there's always something kept from the client (it's called sales!).
My opinion about the cosi loan there is absolutely nothing wrong with this loan!! Do your homework before getting into any type of loan and if you don't understand how it works speak to someone who does.
Good Luck & God Bless
Posted by Maritime
Sat Feb 9th, 2008 03:05 PM
I can only add that I agree with Kat. Great loan if you understand it.
Second, dont go to a random loan officer, go straight to the source. World Savings bank is the originator of the index. Wachovia has just purchased World Savings bank and is now offering this exact loan with additional benifits
www.wachovia.com. The only concern is your margin that is added to the moving index.
Margin + index is your total interst.
Lastly I would only suggest this type of loan if you understand it and can benifit from it while still paying down the principle.
Posted by R J Reis
Mon Apr 7th, 2008 07:45 PM
I was offerrd a 4.875% fixed 5 year arm,with a good faith offer. After loan apps were signed the "bank" did a voodo math calculation and withdrew the offer[can they do that]. The broker then offered a Wacovia COSI at 7.6% paper rate to be paid in 24 payments per year for a "real" rate in the low 4s. This sure smells like bait and switch. How would I know it there is neg amortisation? You commented that you had to beat it out of them with a stick
R J R
Posted by jim botti
Mon Apr 14th, 2008 01:51 PM
First Federal Mortgage offered me a Cosi Advantage loan 24 yearly payments fixed for ten years at 4.3% 70% ltv, 700 plus credit score, I Can easily make 30 year payments, has 2% prepayment penalty for 3 year, 1% origionation fee Sounds good to me..ps payment at 30 yr. fixed includes p&i
Posted by Calvin
Wed Aug 20th, 2008 04:37 AM
I DISAGREE FROM A MORTGAGE BANKER'S VIEW
Subprime relates to individual with a FICO (middle credit score) below 580. To qualify for a COSI loan your FICO score has to be above about 680 (these individual are highly responsible) and you have to have 3 times your monthly mortgage payment in cash reserves (saving account).
A subprime individual interest rate maybe 8% on 300K loan is a $2201 monthly payment, with the choice of paying $1101 a month with a COSI Loan (a 50% saving) could save a couple of people from foreclosure or if they were in a COSI Loan and had saved the difference of $1100 - they may have been able to ride out this crisis.
DO NOT BLAME THE INDUSTRY, IF AN INDIVIDUAL DOES NOT USE THE PROGRAM PROPERLY.
Posted by ladge
Thu Nov 13th, 2008 07:27 PM
Sorry but I must agree that your article against COSI and COFI loans was one-sided. There is nothing wrong with a COSI or COFI loan if it makes sense for the individual. Portraying these types of loans as "bad" loans because they were given to someone by dishonest mortgage brokers is similar to saying guns kill people - the person pulling the trigger has nothing to do with it.
As Calvin pointed out, these types of loans do require more "A" paper type of people than subprime. Some lenders did offer subprime COSI and COFI loans, but they had nowhere near the low payment rate as the "A" paper loans. Another inconsistency with your argument is this: Subprime borrowers typically don't have much equity in their home as "A" paper people. Lenders put loan to value limits on this loan to prevent them from going upside down. You need to have the equity to make this work. Did you think they were going to give a COFI loan to someone with 5% equity in their home and 550 credit scores? Something doesn't match up here with my own experiences.
These loans do not have default prepayment penalties. Some of them may give you a lower payment option by taking a prepayment penalty. Some money-smart people didn't mind having a one-year pre-payment penalty added on because they knew this coincided with how long they would be in the house, and they could make the lower payment.
Here's an example of a COFI loan that worked for someone. A retired gentleman living on Lake Washington was living on a fixed income. His property taxes were climbing drastically. He needed a lower payment. He asked for a COFI loan. Did it make sense? Well, you tell me. He made his payment at the 1.95% rate. Yes, money was tacked back on to his loan amount. But we calculated that at the end of one year, his loan amount would have climbed by about $25,000. In the previous year, his property value had increased by $80,000. Property values were still on the rise. He was looking to sell his house in a couple years and move. Seems like a pretty good deal to me.
Don't blame the loan for being used in the wrong scenario. If you had a bad experience with a loan officer giving you something not right for you - that's too bad. It's a good loan in the right situation. Perhaps you should have written an article on bad loan officers selling COFI's instead since that seems to be at the heart of your problem.
Posted by Suzie@ 100% Mortgage
Tue Nov 10th, 2009 12:26 PM
I find it quite frightning just what has been going on and the state with the subprime loans that we find ourselves in right now.
Posted by links of london
Wed Jul 7th, 2010 02:35 AM
good post.thanks for sharing.
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