Adjustable-rate mortgages carry warnings
When fax machines overflow with tempting offers of low mortgage interest rates, consumers having difficulty balancing holiday wish lists with mortgage payments may look at the “1 percent*” interest rate and call the toll-free number.
“If a consumer gets a fax and it says call this number to find out about a loan you really should just throw those faxes in the garbage,” said Felicia Rotellini, superintendent of the Arizona Department of Financial Institutions.
Because the state sometimes cannot regulate out-of-state firms making solicitations on the Internet, Rotellini recommended that borrowers find a licensed mortgage banker or broker or get a referral from someone who has had a positive mortgage lending experience.
“Stay away from Internet lenders or solicitations,” she cautioned. “They may be recommending something the consumer can’t afford and often are just looking to close a deal in order to get a commission.”
The advertised “1 percent*” interest rate can move upwards rapidly as fine print reveals that the adjustable-rate mortgage changes with the economy.
One of the effects of the cooling real estate market is that tens of thousands of Americans are having difficulty paying mortgages based on rising interest rates, said Renee Gerke, senior mortgage consultant with Homeowners Financial Group in Tempe.
Nearly 25 percent of mortgages or 10 million carry adjustable interest rates and most of them went to people with sub par credit ratings who accepted higher interest rates, according to statistics provided by the Mortgage Bankers Association.
These creative products are growing in popularity in Arizona and other states, with the offering acceptable for sophisticated borrowers who can afford a large monthly payment down the road, said Richard Fergus, the Arizona Department of Financial Institutions complaint manager.
Complaints are going up
Although the department doesn’t keep statistics, complaints against mortgage brokers and bankers have increased over the past several years. The number of licensees also has grown, he said. The department regulates 2,145 mortgage brokers and bankers.
Their names are available at the department’s Web site at www.azdfi.gov under list of licensees. The site also has regulatory alerts and final orders against disciplined brokers and bankers.
The state currently has 295 active complaints, Fergus said, and closed complaints dipped slightly from 474 in 2005 to 502 in 2004, he added.
The closed complaints were cases in which the consumer’s concern was resolved, there were no violations of state law or a licensed mortgage broker or banker was disciplined.
Rotellini said that while the state doesn’t regulate foreclosure rescue schemes or bridge loans that claim to help homeowners behind on mortgage payments, the department can intervene if the company is taking an interest in the property and engaging in mortgage lending without a license.
Consumer warnings and solutions
“As interest rates rise, many homeowners who have adjustable-rate mortgages may see increases in their forthcoming annual adjustments,” Gerke warned.
Because the prime rate always rides at 3 percent above the current federal funds rate, now at 5.25 percent, the monthly payments for ARMs or adjustable-rate mortgages go up, Gerke explained.
Current mortgage interest rate information may be found at www.mortgagenewsdaily.com , but be aware that this site has imbedded ads for refinancing “as featured on Oprah Winfrey” or “1 percent Pay Option Arm Loans,” the type of firms the state Department of Financial Institutions warns about.
The site also shows examples of how some offers fail to include taxes, fees, insurance and other costs as well as the rising interest rates which can change monthly until the payment may be almost twice the amount at the start of the loan.
“Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed-rate mortgage,” Gerke suggested.
“This is also a good time for borrowers who started out in an adjustable-rate loan due to a poor credit score to transition into a fixed-rate loan if they can,” Gerke added.
“Once a track record of making mortgage payments on time and in full has been established, this should have a positive effect on the credit score and there’s a good chance the borrower may now qualify for a loan with a lower interest rate,” she said.
“As with any decision to refinance, it is important to take the terms of the existing loan, the cost of the new loan and the borrower’s long-term needs into consideration,” Gerke cautioned.
Others who have used one of the option mortgages in which extremely low payments fail to pay the interest may find that the unpaid interest is put on the mortgage balance and the borrower ends up with a loan greater than the original balance.
Potential consequences for nation’s economy unclear
America’s real estate boom was partly fueled by an array of cut-rate mortgages that assisted millions in qualifying for home or refinance loans. And to afford the increased prices, many turned to adjustable-rate loans, option arms and other loans with low initial payments. This brought America’s home ownership rate to a record 70 percent.
The overall effect on the United States’ economy as it slowed down was that investors sold off stocks and reallocated money to bonds and mortgage-backed securities, Gerke explained.
“The purchase of mortgage-backed securities drives interest rates down. When economic data say there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives mortgage interest rates up,” Gerke said of recent changes.
The current market affects home owners with adjustable-rate mortgages tied to indexes based on short-term interest rates such as the twelve-month treasury average, she explained.
The superintendent testified before the United States Senate Banking Committee in September regarding alternative mortgage products, but said it is too soon to say how these lending practices might affect the overall economy.
“The overall picture is that the higher home values motivate people to get a loan with options so they can afford their house. “It’s too soon to tell, but we are concerned that down the road borrowers can’t afford the increased mortgage payments and will default or have to refinance,” Rotellini said.
“If they are able to refinance, it’s a boon to the lending industry in 18 months to five years. But if a person can’t afford to refinance and the value has gone down there will be a large number of foreclosures and more homes on the market. Lenders will be taking the loss.
“These are the potential risks down the road and what we’re telling our banks and credit unions is to utilize good underwriting to put borrowers in loans they can afford over the amortized life of the loan and to follow very good policies and practices,” Rotellini added.
The federal government has recommended that chartered banks and credit unions offer products to manage the risk. “There should be a balance between innovation in lending that allows people who otherwise wouldn’t be able to get into a home vs. heightened regulation when you’re concerned that using products may help someone get into a home but unsure if they can stay in the home,” Rotellini cautioned.
“We don’t want to chill that innovation in lending that provides credit to a greater number of borrowers, but there needs to be a level of soundness for regulated entities,” she said.
Consumer tips for a mortgage appropriate for the borrower
Key ingredients for loan shoppers to consider are: disclosure in plain language of the terms of the mortgage loan and interest payments and how much notice there will be of increased payments.
“Borrowers should shop around, don’t sign anything that’s incorrect and don’t sign anything with blank spaces,” emphasized Richard Fergus, the state Department of Financial Institutions complaint manager.
He added that they also shouldn’t sign anything asking them not to look for a better deal.
“Correct information should be on the application package to ensure loan officers and lenders are assisting consumers in getting into an appropriate product,” he cautioned.
There should be a toll-free number for consumers to check for information on the lender, and if it is a financial institution licensed to do business in Arizona, records are available at the state Department of Financial Institutions.
When a fee is charged to apply for a mortgage, it must be clearly stated in a written agreement, according to Arizona law found at azleg.state.az.us under statute 6-946.
For more assistance, visit the Arizona Department of Financial Institutions web site at http://www.azdfi.gov or call (602) 255-4421. A complaint form can be downloaded from the site or consumers may visit the office at 2910 N. 44th St., suite 310, Phoenix.
The Web site includes links to national and federal offices regulating other types of organizations such as Bank of America, JPMorganChase, Wells Fargo Bank and others not regulated by the state.
Some out-of-state promotions may not be covered by state laws depending on whether the company is doing business as a mortgage broker or banker.
These could include the fax marked for urgent review by all employees and calling for a reply regarding the “lowest mortgage rate” available in the market today. Although some offers promise a monthly payment of $648.28 for a $200,000 loan, the starred fine print reveals that this is an adjustable-rate mortgage.
Even the fax promising a “2.6 percent* fixed minimum payment for five years with approval in minutes and no income verification, low credit scores = not problem, delinquent, foreclosures, liens, bankruptcy – OK and get cash now and consolidate debt = OK” also have an adjustable rate that can go much higher in five years.
Others offering refinancing with “Good Faith Principles” by Christian Familyloans.com, carry in fine print the revelation that the company is not affiliated with any religion or faith-based institution.
Be careful about responding to the ASAP, because, just as the promotion states, rates may change.