The Board in conjunction with the Office of Thrift Supervision issued a revised version of its venerable Consumer Handbook on Adjustable-Rate MortgagesThe brochure was developed "in consultation with the following organizations" which included some members of the housing industrial complex (Mortgage Bankers Association, National Association of Home Builders, National Association of Realtors) who cannot be trusted.
(the CHARM booklet.)
Under the Board's Regulation Z, every lender must provide a copy of the CHARM booklet or a suitable substitute to every borrower who makes application for an adjustable rate mortgage. The booklet which was originally published in 1987 has been periodically updated but with the current concern about borrowers overextending themselves by choosing ARMs during a period of rising rates and putting themselves at even greater risk by picking so called exotic variations on ARMs such as interest only or option ARMs, the revised booklet is timely and one hopes also helpful.
The book has a solid discussion of how ARMS work. However, the big picture risks are not properly detailed.
For example, there is NO mention of the risks of foreclosure or losing your housing unit. [Search the brochure, the word 'foreclosure' is NOT mentioned.] The Federal Reserve Board should be ashamed of their lousy brochure. How can one write a proper 37 page brochure about ARMs and not mention the term foreclosure?
Posts
suzanne researched it
ReplyDeleteLOL! :-)
ReplyDeleteDavid,
ReplyDeleteI think you've forgotten that when a borrower gets approved for an ARM, their income and debt-ratios must be such that even under worst case scenarios (i.e., interest rate rises to cap) they are capable of making the payments. Like ANY loan there is of course always a risk of foreclosure if the borrow decides they rather spend their money elsewhere or if circumstances change and they find themselves with insufficient income to meet their obligations. This is an obvious risk associated with ALL home loans. Is it really necessary to insult the intelligence of the borrower by spelling it out? Doesn't every borrower know that if you don't make the payments on your house you lose it?
Lance wrote "I think you've forgotten that when a borrower gets approved for an ARM, their income and debt-ratios must be such that even under worst case scenarios (i.e., interest rate rises to cap) they are capable of making the payments"
ReplyDeleteThis is untrue! That is why so many folks have already lost their home to reseting ARMs.
Lance,
ReplyDeleteAlso see:
"Fannie Mae has announced that, effective Jan. 30, borrowers must be qualified at "a fully-indexed rate that assumes a fully-amortizing repayment schedule" in order to qualify a loan for purchase by the government-sponsored enterprise."
http://mortgageservicingnews.com/plus/#5
LANCE,
ReplyDeleteWhat do you do for a living in DC? Are you a paid writer for the NAR? Are you worried about your home losing value, seeing the bubble popped? Do you collect a check for being nuts and have nothing better to do than write bull$hit? Do you believe that the people who lost their houses to ARMs knew up front they would go belly up;
many of the borrowers did not understand the mortgage product they were dealing with and the lender's did not bother to mention it.
You let the banks get together and form a bankers' central bank, and this is what they will do.
ReplyDeleteA Redskins fan
David said...
ReplyDeleteAlso see:
"Fannie Mae has announced that, effective Jan. 30, borrowers must be qualified at "a fully-indexed rate that assumes a fully-amortizing repayment schedule" in order to qualify a loan for purchase by the government-sponsored enterprise."
Once it becomes obvious that stricter regulatory guidelines would knock out the high-risk lending, the politicians will stop them from being issued. Interests from every dung-pile imaginable will emerge to lobby to keep the looser lending standards: the realtors, the lenders themselves, homebuilders, and so-called "citizen" groups (who want cheap access to credit for every loser with a 510 FICO score.)
No way will stricter regulations come into existence, at least, any that have a meaningful impact.
I can already hear activist groups complaining the new regulations disproportionately affect minorities
Lance:
ReplyDeleteI think you've forgotten that when a borrower gets approved for an ARM, their income and debt-ratios must be such that even under worst case scenarios (i.e., interest rate rises to cap) they are capable of making the payments.
So untrue.
The option ARMs to date have qualified the borrower on the initial "teaser" payment with the knoledge that when the reset occurs the borrower is going to face a payment that will be 150% to 300% of the teaser payment. The new guidlines that go into effect 2/1/2007 require what you suggest.
We have a few years of foreclosures to go through first. We also will see a rationalization of prices down to where people can afford homes without these loans. Did you seriously think that people were being qualified for the worst case interest rate? Sigh... We've been writting about the loose standards for over a year...
anon said:
Once it becomes obvious that stricter regulatory guidelines would knock out the high-risk lending, the politicians will stop them from being issued. Interests from every dung-pile imaginable will emerge to lobby to keep the looser lending standards: the realtors, the lenders themselves, homebuilders, and so-called "citizen" groups (who want cheap access to credit for every loser with a 510 FICO score.)
No way will stricter regulations come into existence, at least, any that have a meaningful impact.
Too late. The market is losing its appetite. Unless the guidelines change, Fannie Mae et. al will fail... that would be far worse.
Neil
David, you are way out to lunch on this one.
ReplyDeleteThe brochure starts with these bullet-pointed warnings, prominently featured on page 1.
"Your monthly payments could change. They could go up--sometimes by a lot--even if interest rates don't go up.
Your payments may not go down much, or at all--even if interest rates go down.
You could end up owing more money than you borrowed--even if you make all your payments on time.
If you want to pay off your ARM early to avoid higher payments, you might have to pay a penalty."
I think that's pretty up-front about the risks.
David, they didn't choose to use your more loaded language. That doesn't make it a conspiracy, dude. The whole point is to warn people of risks, not to tell them how to live thir lives.
Keith,
ReplyDeleteI did write "The book has a solid discussion of how ARMS work"
Also, you wrote "David, they didn't choose to use your more loaded language."
The word foreclosure is NOT a loaded word. It a reality for hundreds of thousands of ARM borrowers in the US.
I think the interested parties know that people will read such brochures about as fast as they scroll through software use agreements (if even that much as there's no check box at the end.)
ReplyDeletePeople in the mortgage/re business have the status of expert, it helps them close a sale, but they want to take no responsibility for the fact that average people don't approach the transaction with a high degree of suspicion and in fact have the nerve to "trust" them.
This is what average people do with one another in getting through their daily lives. It is the was society achieves a degree of structure, stability and civility.
What I was going to say was that the behavior of the financial services industry in general is ethically lazy, but that's too benevolent a term, it's parasitic and ultimately destabilizing. It should be labeled criminal, but that's too much to hope for.
David/Others,
ReplyDeleteI know that when I was looking at a house that was beyond my means, my lender qualified me on a worse-case scenario. I know that because I remember her telling me "yes, you can afford this house now, but you wouldn't be able to afford it when the loan reset. You don't qualify for the loan amount." And yes, it's true that the Realtor was pushing me on that house ... but "the system" worked since the lender said "no". I ended up changing Realtors partly partly because of that ...
David said...
ReplyDelete“The word foreclosure is NOT a loaded word. It a reality for hundreds of thousands of ARM borrowers in the US. “
And 2.2 million sub-prime borrowers.
Purchasing an automobile, and then using that automobile for its intended purpose, can lead to death, dismemberment, and disfigurement. In fact, use of automobiles DOES result in all of those horrid things on a daily basis; year in, year out.
ReplyDeleteRemember that the next time you see Tiger Woods on TV, shilling for Buick.
The government should step in and put warnings on all automobile advertisements.
Non Anon
G'day mates!
ReplyDeleteOzzie Tim here.
This is a ripper: "How can one write a proper 37 page brochure about ARMs and not mention the term foreclosure?" That stands out like dog's balls! Since real estate only goes up and interest rates only go down, there can be no such thing? Right?
Now that's good oil!
figjam!
Hooroo. Ozzie Tim
If the car comment is supposed to be some analogy to the housing market I beg to differ. We liscence drivers, we require people to get insurance, we set up a structure of traffic laws - all in an effort to promote stability and mitigage costs that ultimately are shared by everyone.
ReplyDeleteWhen it comes to the mortgage markets (or any place else people make these inane caveat emptor arguments) I'd just like to say that I'd be all in favor of social darwinism if it didn't destroy my way of life in the process. Whether they have mismanaged their finances by choice or ignorance, people still show up at the emergency room demanding treatment, they still want clean food and water, they still want their children educated and they still demand police and fire protection. They also end up with uninsured/unmaintained cars (because they don't have the money for repairs), a willingness to occupy substandard housing (which necessarily multiplies) and a bitterness that further decreases their ability/willingness to be self-supporting and contributing.
So yeah, if that means that banks have to be forced blame their decision on some "stupid" gov't regulation that standardizes the conditions under which they can approve someone for a mortgage I'm all for it.
concerned63 said:
ReplyDelete"So yeah, if that means that banks have to be forced blame their decision on some "stupid" gov't regulation that standardizes the conditions under which they can approve someone for a mortgage I'm all for it."
Concerned, rather than foist your totalitarian ways on the rest of us, why don't you just move to a communist country (if you can find one that's left.) Thank you much, but personally I rather be left to make my own decisions and possible mistakes. I don't need a government bureaucrat deciding what is best for me.
"Concerned, rather than foist your totalitarian ways on the rest of us, why don't you just move to a communist country (if you can find one that's left.) "
ReplyDeleteAnother excellent example of your ability to carry out rational thought.
sorry folks to be off topic. but a few posts below this one lance "THE BRANIAC" world smartest man and his partner in crime VA "SELF APPOINTMENT SMARTEST WOMEN IN THE WORLD went on a march. the march was a journey to show us how the WSJ and the US GOVT tell us that inflation was a mere 2 % or so and that all of us (stupid folk) living in the real world (buying groceries, paying for gas, paying for food) are drinking coolaid.
ReplyDeletewell boys and girls facts are facts even is you are from the tenth planet (which is where i suspect those two live...are they husband and wife???) consider for your contemplation the following FACTS..look them up yourself:
gold up 23 yoy
m3 up 10% yoy
copper up 40% yoy
oil up 16% yoy
nickey up 166% yoy
gasoline up 5%yoy
anon said that real inflation rate was about 10% and anyone WITH a brain who also keeps himelf warm, drives a car, eats, drinks and lives in the real world would readily agree with.
but i forget..VA and Lance are so sharp that they buy everything at 50% off. Well goldarn, that explains it...to them the inflation rate is only 5%..now i get..yeah, that the ticket...geez...i am going down to the basement to get my paintscaper...
Lance said...
ReplyDelete“Thank you much, but personally I rather be left to make my own decisions and possible mistakes. I don't need a government bureaucrat deciding what is best for me.”
I agree Lance. Let them take out their interest only, negative amortized, adjustable rate mortgages. Hell, I’ll even drive them to closing and fork over a $10 Home Depot gift card as a house warming gift.
"We liscence drivers, we require people to get insurance, we set up a structure of traffic laws "
ReplyDeleteHomeowners are required to purchase homeowner's insurance when they have a mortgage. (look into personal injury provisions of homeowner's policies) Homeowners are subject to zoning laws, noise laws, etc.
Beg to differ all you like, but personal responsibility plays a major role in the home buying and home owning processes. Just as personal repsonsibility plays a role in buying and operating a motor vehicle.
Non Anon
Hey David,
ReplyDeleteWhen the economy goes south, you know who's going to be one of the first to lose his job? "A 26-year-old information-technology specialist." HTH
"anon said that real inflation rate was about 10% and anyone WITH a brain who also keeps himelf warm, drives a car, eats, drinks and lives in the real world would readily agree with."
ReplyDeleteI am not one to agree with Lance or VA_Investor. But your 10% number is not correct. The CPI is up 2-3%. Also crude oil prices were flat to slightly down in 2006, not up 16% as you put it.
wrong. saudi light crude was selling for approximately $50.00 a barrel on or about january 1st, 2006 today it sells for approximately $58.00 a a barrel.. that makes 16%. LOOK IT UP. Hey buy the way when is the last time you bought anything, paid your power or your health insurance premium?????
ReplyDeletehey fellow anon, if you understood what inflation really was (increases in the money supply) you would get a clue from the fact that the fed won't even publish M3 anymore (the broadest measure of the increase in money suppy). if M3 is increasing at 10% that must be the minimum rate of infaltion. prices increases are a symptom of inflation not the cause. you must live in a cave.
ReplyDeleteAnonymous said...
ReplyDeleteHey David,
When the economy goes south, you know who's going to be one of the first to lose his job? "A 26-year-old information-technology specialist." HTH
January 04, 2007 7:25 AM
Hey Anon,
Makes you wonder what those poor souls that bought overpriced house's are going to do, when they lose their job's, when recession begins. I'd be much more comfortable being able to taking another job, to pay my monthly "rent", and not being screwed for the next ten year's with a bankruptcy on my credit report and a Fico score of 500. Hope that helps!
The problem with projecting interest rates based on inflation is that the Fed has lost a great deal of control on rates. The 800lb Gorilla in the room is the dollar, foreign debt, and the carry trade. For a number of years, we could handle the twin towers of national debt and trade deficit beacuse the rate spread was in our favor. We gave a greater return than our creditor's central banks, so the carry trade worked for us.
ReplyDeleteNow the rates have reached effective parity. If we lower our rates, the carry trade goes against us.
This is why the Fed. keeps harrumphing about inflation targets in a low inflation environment and a slowing economy. They really can't lower rates, but also don't want to openly say that Europe and Chin effectively now own our monetary policy. Bad for business.
well lance and i finally agree!!!
ReplyDeleteget the government out of our lives for good, if i wanna smoke a weed buy some sex or gamble my life away i should be able to do so WITHOUT the threat of inprisionment.....i should also be able to drive my car as fast as i want on the freeway!!!
lets get rid of the nanny state!!
keep up the good work Lance cause you are on the right track on that one!!
"wrong. saudi light crude was selling for approximately $50.00 a barrel on or about january 1st, 2006 today it sells for approximately $58.00 a a barrel."
ReplyDeleteYes, I looked it up, which is why I pointed out you were wrong. The least you could have done, is double checked your data. Here is one source, I can give you others. Oil prices peaked in July 2006 to about $75 a barrel and have been coming down since then. Oil prices were at $60 in January 2006.
http://en.wikipedia.org/wiki/Oil_price_increases_of_2004_and_2005
"that makes 16%. LOOK IT UP."
Atleast you can do math. Did you do that in your head, or use a calculator?
"prices increases are a symptom of inflation not the cause. you must live in a cave."
Hello, Lance number two. Price increases ARE inflation. This IS measured by CPI. Money supply CAUSES inflation.
Not only do we have to put up with Lance and VA, but some other jokers as well. *sigh*
Anonymous said...
ReplyDelete"hey fellow anon, if you understood what inflation really was (increases in the money supply) you would get a clue from the fact that the fed won't even publish M3 anymore (the broadest measure of the increase in money suppy). if M3 is increasing at 10% that must be the minimum rate of infaltion. prices increases are a symptom of inflation not the cause. you must live in a cave."
So, real increases in wealth shouldn't be accompanied by a corresponding increase in the money supply? From what I recall from econ classes, inflation is that part of the increase in the monetary supply that isn't backed by real increases in wealth creation. With the economy growing both in terms of productivity (output per person) and the absolute number of workers (due to population gains), isn't it reasonable to assume that at least some of the percentage increase in the monetary supply is due to this? The government obviously does since they are only attributing 2.3% to inflation per the poster above.
That said, I can understand where some of us out there truely are experiencing much greater inflation than the average being reported. As I have been saying all along, the changes we've been experiencing as we transition to a pan-global economy are leaving some people behind. While it may be true enough that they pay no more percentagewise for goods as everyone else, it shouldn't be overlooked that they are also being left to directly pay for more things than they did in the past. For example, 25 yrs ago, almost all workers would have had health care provided to them. Now, many workers must purchase their own ... or at least pay a far larger share of it then they did back then when the employer usually covered the entire premium and deductibles were much lower. Additionally, this average worker would have been in manufacturing earning a lot of cash. Now, the average worker is in a service industry and earning far less at places like WalMart. So, this worker may not being paying more percentagewise for what he purchases than the "have's side" worker, however he has far more things he has to pay for himself ... and he has to do it with far less income than his counterpart 25 years ago. For him this is "inflation", even if that is not the accepted definition of it. For him, everything in the aggregate costs a larger proportion of his nowadays smaller income. He is poorer in the same way that others affected by inflation become poorer. So, yes, in this sense we've had great inflation in the country ... for some of us.
Anonymous said...
ReplyDelete"well lance and i finally agree!!!
get the government out of our lives for good, if i wanna smoke a weed buy some sex or gamble my life away i should be able to do so WITHOUT the threat of inprisionment.....i should also be able to drive my car as fast as i want on the freeway!!!
lets get rid of the nanny state!!
keep up the good work Lance cause you are on the right track on that one!!"
Anon, I have no trouble with the government stepping in when your actions will be hurting others, and while that is the case can be debated infinitum for the examples you bring up, it is pretty clear that someone overextending themselves can only hurt them and the lender extending them the credit, i.e., both the willing partners of the credit agreement. Government deserves no role in interfering in what is an agreement between two parties on a level playing field. Government doesn't need to protect people from themselves.