PROPOSED GUIDELINES
FOR ARM ADJUSTMENT RELIEF
We have yet to be informed about all of the details on a
newly agreed upon program to provide relief to borrowers facing loan
adjustments. The information regarding the Administration’s (and a few
key lender’s) proposal has been parceled out in
increments. The early news was that
the rules would apply to borrowers who acquired loans starting in 2005 through
July 30th of 2007. The rates on these Adjustable Rate loans were
scheduled to rise beginning January 1, 2008. The policy was to be aimed at
borrowers currently making on-time payments on loans at their introductory
rates but who will be unable to afford the adjusted rates and accompanying
payments. The information remains vague as to the procedure for determining
those who will not be able to afford payment adjustments. Plus, it seems that
those who have already missed payments and have signaled that they are unable
to make adjusted payments are without an available remedy.
Many of the borrowers
who are now ineligible for assistance were advised by these same institutions
that the only way to receive any help was to actually go into default and
possible foreclosure. Having taken that advice, they now find that having
missed payments makes them ineligible under the new guidelines.
The proposal is to freeze for five years the current
“affordable” rate and payment, thereby presumably avoiding
potential foreclosure for several million borrowers. The program will be
available only to owner-occupied borrowers who are current on their
payments. The anticipation is that
within the five year period this market downturn will be stabilized, the
over-stocked supply of inventory will be sold and the current price slide on
home values will have stopped.
Another criteria is that the first mortgage, by itself, must be more
than 97% of the home’s value. This would seem to eliminate those
borrowers who acquired 100% financing by obtaining two loans, an 80% first loan
accompanied by a 20% second loan. This combination of loans was often
“sold” as a way to avoid Private Mortgage Insurance (PMI), usually
required when the down payment is less than 20%. Criticism is growing from a
considerable number of borrowers who opted for this combination of loans and
seem now ineligible for assistance.
Another unanswered question is how the pre-payment issue
will be treated? Most of these loans had hefty pre-payment penalties that kick
in if the loan is refinanced. If the loan is modified and fixed for five years,
will the pre-payment penalty be forgiven or ignored? Others criticize the fact
that only borrowers with a 660 FICO credit score or less are eligible. These
same borrowers cannot have experienced a credit score increase of more than 10%
since the loan was originated or they become ineligible. The assumption is that
higher credit score borrowers need no assistance. That may prove inaccurate and
some are already questioning how this will all be determined and complaining
about the inequity of the selection process in general.
There are other criticisms
emerging. Borrowers who tried to make reasonable decisions and purchased homes
for which they have had to struggle to make their mortgage payments view the
program as a bail-out of those who purchased homes that they could not afford.
These borrowers suggest that the program seems designed to help those who made
the poorest decisions regarding loans that they couldn’t afford and view
the proposals as unfair.
Others indicate that
interference in what should be a free-market adjustment will prolong any real
solution to the problem of persons having bought homes they can’t afford.
Critics further suggest that interference in what many view as a necessary
aspect of the market, the ability of the lender to foreclose when a borrower
defaults on loan payments will diminish lenders ability in the future to
enforce a commitment to pay on a mortgage.
Clearly, there are
complications for those who are seeking ways to help borrowers as they are
restricted by the rules that govern the sale of the original loans. Most loans
were bundled upon origination into securitized loan pools for sale to
investors. Those investors have placed limitations on how their loan terms can
be modified. That is why, as the eligibility criteria continues to develop,
many believe the number of borrowers who are likely to meet the increasingly
complicated rules will decline. Many now predict that relatively few will be
assisted with estimates ranging from 100,000 to 600,000 nationwide. This is far fewer than the millions
projected when the proposal was first introduced.
It is understandable
that when all is said and done, many believe this will prove to be more flash
than substance. It seems that this is merely a way for government and loan servicers to “pretend” that they are doing something
about the pending foreclosure explosion, in an attempt to “buy
time” for things to work themselves out more naturally. Some critics even
suggest that this is merely a way to divert attention away from the fact that
these same lenders participated in what can be considered fraudulent lending
practices in putting borrowers into these precarious circumstances in the first
place. And all that this will do is postpone real change in lending
practices.
For those few who may find some help, all of this may sound
good. But here is a possible problem. It remains unclear
whether in freezing the rate the lender is essentially turning the loan into a
five year fixed rate mortgage? If the lender is fixing the payments but the
unpaid interest, predicated on the original terms of the mortgage, is going to
be treated like a negatively amortized loan, it may not be the nifty fix that
borrowers are anticipating. If the loan becomes a truly fixed rate loan,
lenders will be giving up a lot of interest during those years. The more likely
scenario is that there will be some way for them to recoup that interest and
the most logical way would be to accumulate unpaid interest and affix it to the
remaining balance of the loan. If this were to occur, borrowers would have to
experience considerable appreciation during the five years in order to be able
to sell and “come out” ok financially. If the market doesn’t
appreciate sufficiently, the result could be merely a postponement of an
inevitable problem.
More recently (February 2008) Washington legislators announced that they
were planning to help all borrowers who were struggling with home payments not
just those facing potential foreclosure. No details were provided and, again,
many believe this to be an empty promise or, as often occurs
in Washington,
more flash than substance. More and more economists are now indicating that these bail out plans will serve the banks and other
investors to the detriment of the consumer, who is being promised help.
This is not over yet. We will keep you informed as the
details emerge.
Webpage/Arm Loan Relief