From the Herald News
Adjustable rate shell game can take hefty toll
By Heather Haddon
Gerard Herard was able to finally purchase a home in 2003 through a $225,070 mortgage from Security Atlantic Mortgage. His payments on the quaint Totowa Avenue house in Paterson were a reasonable $1,300 a month.
But Herard’s payments have since increased to $2,200 a month and the mortgage has grown, not shrunk, to roughly $300,000.
Herard is not entirely sure why his situation changed so dramatically and is struggling to deal with the increase. “I’m trying to climb a steep ladder,” said Herard, 53.In recent years, lenders have lured scores of homeowners to untraditional mortgages with changing terms. Many deals allowed minimum payments at artificially low rates for the first year or two of the loan.
But the sweet deal is ending for thousands of Americans who took out interest-only and payment-option adjustable rate mortgages, or ARMs. After that initial grace period, homeowners faced serious sticker shock — monthly payments that can double or triple because their minimum payment suddenly goes from 1 percent to 7 percent, for example.
…
“I feel for these people,” said Steve Hoogerhyde, a loan officer at Clifton Savings Bank in Passaic. “Now that the piper comes due, they didn’t know or didn’t understand what would happen. They are really stuck.”
…
“I have had calls from people saying that their mortgage started at $300,000, and now it’s $315,000,” said Tom Cosentino, a mortgage specialist at the Greater Community Bank in Totowa.
…
Between 2003 and 2005, the interest-only and option ARMs grew from 10 to 30 percent of U.S. mortgage originations, according to the GAO. The report found that New Jersey had one of the nation’s highest concentrations of interest-only and payment-option ARMs in 2005 because of the state’s high housing costs.
…
Security Atlantic, which issued Herard’s loan, has since been investigated by the New Jersey division of the Office of Inspector General. The company’s loan default rate was twice the state’s average as they approved loans for “potentially ineligible borrowers,” according to the 2005 audit.The GAO is recommending that the Federal Reserve include specific details about untraditional ARMs in the Truth-in-Lending Act. The Fed has promised to establish more guidance around the loans since last year, but they still have not provided a timeline for acting on this, Williams said.
But the beefed up regulations won’t save current loan-holders. “You have to cut your losses like it’s a bad stock,” Cosentino said.
That guy should cut and run. He can probably still make a small profit if he sells now and prices competitively which is a lot better than filing bankruptcy and losing everything. Unfortunately he probably won’t get the opportunity to sit down with someone who can give him his true options in a reasonable, open and neutral manner.
Interesting that mortgage company advertising in the past few days seems to have switched from “pull money out of you house” to: “Shocked at the increase in your option ARM payments? Interest rates are increasing, you may be in danger, let us switch you over into a nice safe 30 year fixed now, at no cost to you (i.e. we will roll the cost into your mortgage)”. Funny how the winds are changing.
I agree, he should just sell the house for as much as he could get. He might still be able to cover his loan balance. But, not for long as prices are heading down. What were these people thinking if they couldn’t afford to purchase the home with a traditional fixed mortgage loan. Did they think rates would stay at 3% forever?
“The Fed has promised to establish more guidance around the loans since last year, but they still have not provided a timeline for acting on this, Williams said.”
Why bother? It’s a little late to close the barn door…
I’ve heard on numerous occasions that these types of loans were not prevalent in NJ or the East coast for that matter but mainly in AZ, CA and FL. But in the MLS I saw (and still do) that a large portion of loans are ARM (but they don’t state what type of ARM loan) and couldn’t help but wonder how many were option or interest only.
And now I read this in the article:
The report found that New Jersey had one of the nation’s highest concentrations of interest-only and payment-option ARMs in 2005 because of the state’s high housing costs.
Rich
Remember this was the fuel that sent this rocket ship further than anyone could have imagined. There is no means to re-fuel. It will get ugly.
I do believe mortgage reform is on the way. Not only will exotic loans all be subprime but getting a prime rate loan will be a bit harder to get. Lowering prices 10-15% isnt going to do the trick. not when the prices are 500 – 800K for a ranch house in need of repair. Its going to take a substantial slash in prices to move inventory at a decent rate. And boy that inventory is piling up.
He got what he deserved. he thought the bank lend him the money at 3% which the bank pays 4%? stupid.
Interesting document out of Mass. This was originally posted up at Ben’s blog. Hat tip to the reader that posted it..
“As you know, the Division of Banks, through its examination force as well as
its investigation of consumer complaints, will continue to take immediate
and severe action against an entity for any mortgage loan transaction
including a reduced documentation loan upon finding or obtaining any
evidence:
That income was intentionally overstated by the entity;
That borrowers were encouraged to overstate income;
That consumers were steered from a conventional, full documentation loan to
a reduced documentation loan because the consumer did not have the income to
qualify for a full documentation loan;
That an application was processed where the entity had reason to believe
that the income provided was not accurate or the source of the income
originates from individuals not listed on the application; or
That an application was processed where the entity had reason to believe
that the borrower’s income was insufficient to repay the loan.
The Division cannot over emphasize the seriousness of the matters discussed
herein or the recent regulatory action taken. Violations of law have the
effect of undermining the entire mortgage industry including all constituent
parties.
Hence ~ the Division has issued emergency regulations as articulated below
and are effective immediately. They will hold a Public Hearing on Tuesday
October 17, 2006 at 10AM in Hearing Room A on the 5th Floor of One South
Station in Boston.
The purpose of the public hearing will be to afford all interested parties
regarding emergency amendments to 209CMR 42.00. The following are the
emergency regulations:
Emergency Regulations Regarding Prohibited Abusive Acts and Practices
Emergency Regulations Governing Mortgage Brokers and Mortgage Lenders
Note: These amendments to 209 CMR 42.00 et seq. were filed on September 8,
2006 and become effective immediately. The Division will hold a public
hearing on October 17, 2006 during which it will take public comments on the
regulations.
209 CMR 42.12A is hereby amended by striking out 209 CMR 42.12A(6) and
inserting in place thereof the following:
(6) It is a prohibited act or practice for a mortgage broker or mortgage
lender to have a consumer sign a blank or incomplete mortgage loan
application or mortgage loan documents.
(7) It is a prohibited act or practice for a mortgage broker or mortgage
lender to sign a mortgage loan application or mortgage loan documents on
behalf of a consumer.
(8) It is a prohibited act or practice for a mortgage broker or mortgage
lender to falsify income or asset information on a mortgage loan application
or mortgage loan documents.
(9) It is a prohibited act or practice for a mortgage broker or mortgage
lender to make false promises to influence, persuade or induce a consumer to
sign a mortgage loan application or mortgage loan documents.
(10) It is a prohibited act or practice for a mortgage broker or mortgage
lender to pressure or coerce a consumer to sign a mortgage loan application
or mortgage loan documents by misrepresenting or omitting crucial
information about the terms of the mortgage.
(11) It is a prohibited act or practice for a mortgage broker or mortgage
lender to discourage a consumer in a mortgage loan transaction from seeking
or obtaining independent legal counsel or legal advice.
(12) It is a prohibited act or practice for a mortgage broker or mortgage
lender to engage in a pattern or practice of failing to make any disclosure
to a consumer required by and at the time specified by any applicable state
or federal law, regulation or directive.
(13) It is a prohibited act or practice for a mortgage broker or mortgage
lender to fail to disclose the type and number of its license in an
advertisement.
(14) It is a prohibited act or practice for a mortgage broker or mortgage
lender for an employee or a person associated with and acting under the
direction of a mortgage broker or a mortgage lender to advertise mortgage
services without naming the licensee and disclosing the license number of
the mortgage broker or mortgage lender under whose license the individual is
acting.
(15) It is a prohibited act or practice for a mortgage broker or a mortgage
lender to require a consumer to use the real estate services of a particular
entity, agent or broker.
(16) A violation of 209 CMR 42.12A shall constitute grounds for the issuance
of a cease and desist order under M.G.L. c. 255E, s. 7 and shall constitute
grounds for license suspension or revocation under M.G.L. c. 255E, s. 6.
Please provide me with any of your comments by Friday, October 13 as I will
collate for distribution to the DOB. Your attendance and your opinion is
encouraged.
Kevin M. Cuff, MPA
Executive Director
Massachusetts Mortgage Bankers Association”
This article is a bizzare example, it can’t be close to the norm. If I’m calculating this correctly, according to the article his mortgage balance went up $75K in 36 months, that’s over 2 grand per month!! But his payment seems reasonable assuming a 30 year loan at 5.7%, doable back in 2003. What’s wrong with this picture?! Can someone shed any light on it?
He’s likely subprime, no money down. I don’t know all the ins and outs of I/O option loans, but I think they are tiered – as your balance grows, your interest rate goes up. I guess it could mushroom.
“anonimous Says:
September 27th, 2006 at 2:04 pm
He got what he deserved. he thought the bank lend him the money at 3% which the bank pays 4%? stupid.”
Actually at 10% reserve requirements the bank charges 270%, so no, it is not stupid.
I agree with anon 2:04p.m. the borrower is getting what he deserves. These are the people that drove the prices of homes to such insane prices. Last yeat, my wife and I were runned over many people like the guy in the article. Whereas we save for a traditional 30 year fixed loan with a 20% downpayment, people like the guy in the article came in and outbid us and paid well over asking price. I have no pity for these people.
“Between 2003 and 2005, the interest-only and option ARMs grew from 10 to 30 percent of U.S. mortgage originations, according to the GAO.”
-talk about uncharted waters!
There is now way that his balance and payment would go up – if he made the minimum payment, yes he would go into negative amortization – but if he made the required interest payment, his balance would not increase. The flex option mortgage is often great to start with, but people give it a bad rap. If you always pay the interest required you’ll never get neg amortz – if you can’t afford the payment then you should be buying a house to start with – go rent!
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