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.