Open Thread: Closing the Barn Door on Sub-Prime ARM Mortgages
To be filed under "Better-Late-Than-Never" regulatory actions: The Federal Reserve is considering the following changes in Sub-Prime lending disclosures:
The federal financial regulatory agencies today issued proposed illustrations of consumer information for certain adjustable-rate mortgage (ARM) products described in the agencies' Statement on Subprime Mortgage Lending (Subprime Statement), effective July 10, 2007. The Subprime Statement recommends communications that ensure consumers have clear, balanced, and timely information about the relative benefits and risks of certain ARM products. The illustrations are intended to assist institutions in providing this information.
(Below is a table of the proposed changes)
So is this a case of too-little-too-late, or might this actually accomplish something positive?
What say ye?
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click for larger table
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The rest of the proposed changes are after the jump . . .
Here is the text version:
Important Facts About Your Adjustable Rate Mortgage
Whether you are buying a house or refinancing your mortgage, this information can help you decide if an adjustable rate mortgage (ARM) is right for you. ARMs can be complicated. If you do not understand how they work, you should not sign any loan contracts, and you might want to consider other loans.
With an ARM, the interest rate on your loan is not fixed. Instead, it changes over time according to a formula – typically, a base interest rate (index) plus a certain percent (margin) (for example, the Prime Rate plus 3 percent). So, if the base interest rate increases, your interest rate and monthly payment will also increase.
Some specific terms of your ARM loan are explained below.►Your loan will have a reduced initial interest rate.
Some ARMs have a reduced interest rate (start rate) for a short period of time – for example, the first two years of the loan. This rate is less than the index plus margin rate. This means that your interest rate and monthly payments will be lower than normal for the first two years. However, your interest rate and monthly payment may increase significantly when that period is over – even if market rates stay the same. And, your interest rate and monthly payment will increase even more if market rates rise.►Your monthly payment will not include an amount to cover taxes and insurance.
In some mortgages, your monthly payment includes both principal and interest and an amount to cover real estate taxes and home insurance – and your lender pays your taxes and insurance out of these funds. In other mortgages, your monthly payment covers only principal and interest, and you are responsible for paying real estate taxes and insurance premiums when the bills arrive. When you are comparing mortgages, or deciding whether you can afford a mortgage, you need to consider whether or not the monthly payment includes an amount to cover estimated taxes and insurance.►You will be required to pay a prepayment penalty if you pay off your loan more than 60 days before the initial interest rate is adjusted. The amount of the penalty will be a percentage of the outstanding balance of the loan.
Some ARMs require you to pay a large prepayment penalty if you sell your home or refinance during the first few years of the loan. A prepayment penalty can make it difficult, or very expensive, to sell your home or refinance – which you may need to do if your interest rate, and therefore your payment, is about to increase significantly.►Your loan will have a balloon payment.
Most mortgages are set up so that you pay off the loan gradually by the monthly payments that you make over the loan term (for example, 30 years). Some ARMs, however, are set up with “balloon payments” – you make the same monthly payments that you would for a 30-year loan, but after a shorter period of time (for example, 10 years), the entire remaining balance of the loan is due. When the balloon payment is due you will usually need to refinance your loan to pay it, or sell your home if you cannot refinance the loan.►Your loan will have a higher price because of reduced documentation.
“Reduced documentation” or “stated income” loans usually have higher interest rates or other costs compared to “full documentation” loans available if you document your income, assets, and liabilities. These higher costs can be substantial.
Sources:
Federal
Financial Regulators Propose Illustrations of Consumer Information to
Support Their Statement on Subprime Mortgage Lending
Federal Reserve, August 14, 2007
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070814/default.htm
Proposed Illustrations of Consumer Information for Subprime Mortgage Lending
PDF, pages 8 and 9
Federal Reserve, August 3, 2007
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070814/attachment.pdf
Tuesday, August 14, 2007 | 09:00 PM | Permalink
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hmmm...seems productive. Let's pass it, so we can repeal it later.
Posted by: DD | Aug 14, 2007 9:07:28 PM
They should just make the lenders portfolio the loans, that'll right the ship right quick.
Posted by: Cal | Aug 14, 2007 9:09:10 PM
Barry, it's so late that Ray Charles could of seen this coming. Anyone who looks at the monthly graph of resets all the way into 2008 begins to tremble, and at this point, who in America who wanted a house doesn't have one?
The real kicker on this latest development is that the poor sheeple have been fleeced twice by the FED. The first time it involved Greenspan advising anyone that could fog a mirror to go into the fun and exciting world of exotic mortgages. Not long after he started raising rates. Oppsy...his bad.
Now the poor sheeple who took out these exotic and toxic loans can no longer get what brung em' there. Now the FED is pulling the very fun and exciting toxic loans so that the sheeple are screwed. They no longer qualify under the new guidelines, and their houses wouldn't comp out even if they could get a loan.
The cherry on top is that the Banking industry lobby got congress to change the BankrupctyLaw so that they now "mean test"and other fun things before you can do a bankruptcy.
Posted by: SPECTRE of Deflation | Aug 14, 2007 9:22:01 PM
are they calling this regulation:
It Will Cost You an ARM and a Leg?
Posted by: DavidB | Aug 14, 2007 9:25:36 PM
It will probably help... In 3-5 years...
Posted by: Robert | Aug 14, 2007 9:32:19 PM
"and at this point, who in America who wanted a house doesn't have one?"
Honestly - why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Obviously, there are plenty of people in America who still "want a house". Of course, there are far fewer than in the past few years. But still a significant number.
Try not to look at things in such stark black and white terms.
Also, the term "sheeple" is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor "sheeple" - all those idiots who are vastly inferior to you.
The irony.
Posted by: slick | Aug 14, 2007 9:35:23 PM
Anyone who would take the ARM would be on crack. I take that back, anyone planning to stay in the home over 28.7 months would be on crack to be precise. This is not mention the higher fees up front for the privelege allowing your payment to go up. (You can always refinance down with little penalty.) This basically is a 36 month balloon, and it should be priced accordingly.
Posted by: M.Z. Forrest | Aug 14, 2007 9:48:39 PM
I would say this is way past late. On the other hand, this may signal the bottom in subprime issues.
Posted by: David | Aug 14, 2007 10:08:19 PM
the bottom on subprime is at least a congressional hearing or three away.
Posted by: a guy called john | Aug 14, 2007 10:22:40 PM
Cue Carole King: "It's Too Late Baby".
Posted by: Winston Munn | Aug 14, 2007 10:23:36 PM
Also, this seems to me to be a bit smug: a not-so-veiled implication that the borrowers were at fault and not the empty-headed banks and mortgage companies that approved the loans.
Maybe this should be mailed out to loan officers.
Posted by: Winston Munn | Aug 14, 2007 10:27:40 PM
At first I thought, wow, I wouldn't sign the docs for that loan after seeing the price difference. Then I remembered I have a fixed 6% loan. Then I remembered that I used to run a mobile closing company. Then I remembered that nobody looked at their docs ... they just signed them. Then I remembered that even after I tried to explain the terms of a loan in such poor terms so as to get the borrower to not sign, they still signed.
So, after I thought about all of that, I realized that the regulation is worthless ... just like most of the regulations. There are fools and they will sign anything. Letting the market actually work is about the only solution (I don't count this last run as a real market since the fed artificially lowered the barriers to entry). The best thing that can happen is that banks require a minimum of 20% down and solid credit. In my humble, loan closing experience, if the borrower is at the point that they can sign a doc, they're not reading the required warnings. It's all just initial here, initial here, sign here, and 20 minutes later the deal is done.
Posted by: montaigne | Aug 14, 2007 10:48:36 PM
I like Option Arms when rates are at or above 15% for Prime borrowers,and prices are reasonable.say 2010 or so.
Posted by: tom stone | Aug 14, 2007 10:50:22 PM
Oh yeah, and ditto to what slick said. I picture anyone using the term "sheeple" as some high school geek, "making fun" of the "popular" kids and slinging 12 sided dice while calling himself Ancalagon and pretending to slay dwarves in his dungeons and dragons role playing game.
Posted by: montaigne | Aug 14, 2007 10:54:45 PM
I think they should change the sample mortgage comparison table so that the mortgage payment on the ARM increases in Year 3, not Year 5.
They currently show the payment increasing in Year 5 with a 2% rise in interest rates. They should show interest rates increasing more quickly so that the buyer sees the worst case scenario.
Posted by: Guy | Aug 14, 2007 11:09:25 PM
slick,
>> >> "and at this point, who in America who wanted a house doesn't have one?"
>> Honestly - why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Surely, you know how to parse his statement intelligently and not idiotically interpret it literally, right?
>> Try not to look at things in such stark black and white terms.
Well said.
>> Also, the term "sheeple" is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor "sheeple" - all those idiots who are vastly inferior to you.
Wait. You've heard of the bell curve, no? If IQ and education are both on bell curves, where do you think the subprime-and-soon-to-be-foreclosed borrowers fit? Those folks really made life-changing, bad decisions by taking those loans, right? And if SPECTRE isn't among them, then why is it so outrageous for SPECTRE to refer to them as sheeple?
>> The irony.
You threw SPECTRE under the bus for perceived "arrogance" but in an arrogant way. I see irony, too.
Hmmm...Are you a Fox News supporter prone to condemn the "liberal elite", even when they happen to be correct?
Posted by: wunsacon | Aug 14, 2007 11:15:42 PM
This guy is always a riot:
ALLAN SLOAN, SR. EDITOR AT LARGE, FORTUNE: We hear a lot these days about problems caused by sub-prime mortgages. Now the name sub-prime mortgage is yet another example of how Wall Street makes ugly stuff sound pretty or as they say, puts lipstick on a pig. We should really call these loans junk mortgages or high-risk mortgages or manure-like mortgages. That's more what they are than sub-prime, which sounds like a little bit less than prime, basically OK.Wall Street sold hundreds of billion of dollars of securities more or less backed by these things -- mortgages, remember, made to buyers whose credit was in doubt. Many of them borrowed the full purchase price of their houses, so if housing prices went down -- which they did -- or borrowers ran into financial trouble -- which many of them did -- there was no cushion. The Street carved these mortgages into pieces and convinced rating agencies, always hungry for fees, that large parts of these loans were triple "A" credits.
It's amazing. Junk mortgages rated as safe as loans made to the Federal government. Now, losses are rising and the lipstick is off the sub-prime pig. It's time for another awful product with a pretty name. Maybe next, the Street can offer investors nuclear waste that glows in the dark and call it carbon-free illumination material. I can hardly wait to buy some. I'm Allan Sloan.
~
While being humorous, he also makes an excellent point. The rating agencies, who are as he wrote "always hungry for fees", knowingly rated these loans as AAA, in exchange for cash.
.
Posted by: VJ | Aug 14, 2007 11:17:51 PM
This is rich! montaigne says "There are fools and they will sign anything" but then piles on SPECTRE for using the term "sheeple".
"Brilliant."
Posted by: wunsacon | Aug 14, 2007 11:19:20 PM
If I understand what Cal means by "portfolio" the loans, yes, that would probably help. (But, didn't we have an S&L crisis just the same? At the time, all those S&L's held the loans on their books. They didn't resell them.)
The notice is late but it will help. While people sign many forms quickly, many of those forms have long paragraphs of small print. This form is different.
If anyone wants to trivialize presentation issues, compare the marketing collateral to the contracts from the same lender. Obviously, when the lender wants to get a message across, they don't do it with pages of 8-point font. They do it with larger font and graphics. If they cared about informing consumers about the risks, the most important parts of the contract would look like a brochure. And borrowers would be far more likely to read it.
Posted by: wunsacon | Aug 14, 2007 11:30:42 PM
"and at this point, who in America who wanted a house doesn't have one?"
Honestly - why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Obviously, there are plenty of people in America who still "want a house". Of course, there are far fewer than in the past few years. But still a significant number.
Try not to look at things in such stark black and white terms.
Also, the term "sheeple" is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor "sheeple" - all those idiots who are vastly inferior to you.
The irony.
Posted by: slick | Aug 14, 2007 9:35:23 PM
Now I know why your moniker isn't "smart", slick. I will discuss any issue you like, but actually have something to say about the subject matter. Share your thoughts regarding the FED and it's policies, and we will see how you do. So far you aren't slick. More like slime.
Also the term sheeple has less to do with intelligence, and more to do with human nature and our herding mentality. Got that slick?
Posted by: SPECTRE of Deflation | Aug 14, 2007 11:42:09 PM
Go to this site for the concept of the word sheeple. It's our human nature to have a herding mentality. It gives us a feeling of security if everyone else is doing whatever to. Bet you my bottom dollar that there are some PhD's and Master Grads in the bunch. Nothing to do with intelligence. SHEESH!
http://flippersintrouble.blogspot.com/
Posted by: SPECTRE of Deflation | Aug 15, 2007 12:00:07 AM
This, of course, will be of no help. What would help? A truly free market for credit. Enough of the nonsense of the Fed, GSEs, and fractional reserve banking...just one man's wishes after a few cocktails!
Posted by: Mike M | Aug 15, 2007 12:00:40 AM
i think the sheeple he's referring to are gullible, mathematically illiterate, liberals who take 0 responsibility for anything, its the big bad lenders fault with their oh so complex ARMs. throw them out on their arses, chalk it up as a learning experience-
Posted by: Mark | Aug 15, 2007 12:08:28 AM
Actually after examining that site again, I'm inclined to state that some of the sheeple really are stupid. In fact most are stupid for believing that you get something for nothing in this world.
They believed that somehow although they make 35K a year, they are entitled to live like a millionaire in a house costing 750K. Is that intelligent?
Honestly, I feel nothing but sadness regarding this train wreck even though everyone concerned deserves what's coming.
Posted by: SPECTRE of Deflation | Aug 15, 2007 12:09:11 AM
"This is rich! montaigne says "There are fools and they will sign anything" but then piles on SPECTRE for using the term "sheeple".
"Brilliant."
Thanks, wunsacon! I have my moments of brilliance.
Moments of finding irony, too:
Your quote:
"Hmmm...Are you a Fox News supporter prone to condemn the "liberal elite", even when they happen to be correct?"
Followed by this ditty from wikipedia (I know, so inaccurate):
"Sheeple is a term of disparagement, a portmanteau created by combining the words "sheep" and "people"; a reference to herd mentality ... The label seems to have originated among conspiracy theorists in the United States of a far right political persuasion. The Wall Street Journal first reported the label in print in 1984, where its reporter encountered the word used by the proprietor of an American Opinion bookstore affiliated with the John Birch Society.[1] In this usage, taxpayers were derided for their perceived blind conformity, as opposed to the conspiracy theorists and tax protesters who thought independently. "Sheeple" are people who pay their taxes and accept what the government and the mass media tell them.[2] A piece of folk poetry circulating among conspiracy theorists puts this usage in a nutshell:
Oh yes, I am a sheeple, and oh so proud to be.
I am way too smart to believe in a conspiracy.[3]
Acceptance of government intrusion and regulation is another hallmark of the "sheeple" according to those who use the epithet."
http://en.wikipedia.org/wiki/Sheeple
Just an FYI on the history of the term since the old-school FOX crowd is the one from which it originated. Anyway, not a dig or anything like that and maybe you're older so "sheeple" is "cool." As I see it, using the term "sheeple" hurts spectre's points which were good.
Posted by: montaigne | Aug 15, 2007 12:10:16 AM
