The second biggest financial debacle facing Americans after the retirement crisis is the mortgage crisis. While many in the media have blamed the failures on reckless borrowers, the real driver of the crisis is lawless banks offering "bait-and-switch" adjustable rate mortgages.
While I've never seen an accurate analysis of the mortgage meltdown, my take is that before recklessness ruled in the 1980s, folks with no credit or poor credit ratings had to build a good rating to be approved for a credit card or mortgage. In the same fashion that credit card issuers instead decided to profit by charging these folks outrageous interest rates, mortgage banks lured borrowers into adjustable rate mortgages. The increase in ARM rates is NOT necessarily based on the underlying prime rate but an arbitrary "reset" that's not only not disclosed to the borrower -- but usually, if not always, increases. A survey of homeowners by the AFL-CIO in 2007 indicated that 75 percent had no idea what their new monthly payment would be after the reset -- even when an increase was disclosed it was in the form of "points", not monthly payments. More than 30 percent of loans that reset weren't based on the raise in the prime rate and the average monthly increase consumed 10 percent of after tax incomes.
For many borrowers, their interest rate could increase by three percentage points in as little as two years -- causing monthly payments to increase by more than 30 percent. That's what happened in my household in 1989. If my husband hadn't gotten a significant raise, I would have had to work a second job -- a challenge when helping to raise a three-year-old son and a daughter-on-the way.
While I'm a huge fan of Elizabeth Warren, the brains behind the Consumer Financial Protection Bureau, I fear that the Bureau has either been pressured by the banks not to tell the truth about the risks or they don't understand them. While the CFPB recently launched a new portion of its Web site called Ask CFPB, their description of ARMs simply says that "part of the interest rate you pay will be tied to a broader measure of interest rates, which goes up when the index of interest rates moves higher," rather than spelling the potentially unaffordable rise in payments.
Why is this information vital? Because if you wind up being stuck with an ARM you very likely won't get your mortgage modified because reckless banks aren't forced to change their ways but are simply "incentivized" to do so. The Home Affordable Modification Program (HAMP) simply provides "cash payments and financial subsidies" to help the lender lower the monthly payment to no more than 31 percent of the borrower's gross income. While JP Morgan and Bank of America are at risk of being "punished" by losing $131 million in incentive payments if their work with delinquent homeowners doesn't improve, why would this piddly incentive matter, given that JP Morgan reported net income of $3.7 billion in the fourth quarter of 2011. Not surprisingly, despite President Obama's pledge in February 2009 to help as many as 7 to 9 million borrowers, thus far HAMP has resulted in only about 1 million loan modifications.
Very likely the finger of blame for recklessness shouldn't be pointed at President Obama but at Treasury Secretary Tim Geithner and former National Economic Council director Larry Summers, "I think the president really wanted to do something aggressive," former FDIC chairwoman Sheila Bair told the National Journal. But Larry and Tim "were focused on the big financial institutions."
Until we get reform, spread the word to avoid these mortgages. With a fixed rate loan, you can always refinance when the interest rate moves lower, although you should probably wait until it's at least two percentage points lower -- otherwise "closing costs" will eat up the benefits.
I provide other tips in a previous blog.
Rachel Havrelock: Converting to JPMorgan Chase
It was the required changes in infrastructure and processes that made these proprietary (non-HAMP) modifications possible (I say this having inside experience). The end result is that the law is helping, though I believe that even if it only helped 10,000 families avoid foreclosure it is still a good law. Every family whose home is saved makes it worthwhile.
Logic also dictates that the lack action against financial execs can be traced directly to the budget deficit; tough choices have to be made. On which do they focus resources first? Fixing the problem or investigating/punishing those who caused it?
Finally, ARMs shouldn't necessarily be outlawed, but their use should be very limited and increases should be detailed in dollar amounts on the Truth in Lending Statement with strict limits regarding frequency and amount of increases.
Good figures on HAMP and modifications on metro area-by-area are available at http://www.housingtrendsenewsletter.com/?id=3249
http://www.consumerfinance.gov/blog/a-model-form-for-mortgage-statements/
One thing that can help is a regular statement that describes what you owe and what you have already paid. Many financial institutions already use such a statement...
Section 1420 of the Dodd-Frank Act addresses this issue. It amends the Truth in Lending Act by including a section on “Periodic Statements for Residential Mortgage Loans.” This section requires creditors, assignees, or servicers to send the borrower a periodic statement for each billing cycle...
Draft periodic statement for residential mortgages.
This is an early draft of a periodic statement for residential mortgages. Click to view full size.
The law specifies several items that must be included:
The principal loan amount
The current interest rate
The date on which the interest rate may next reset
A description of any late payment fees and any prepayment fee to be charged
Information about housing counselors
Phone number and email address for borrower to obtain information about the mortgage
Other information the CFPB may prescribe in regulation
...We have put our model form through one round of consumer testing, and we are scheduling two more. We are posting this version because we also want to hear from the public, including consumer groups and industry. What do you think of it? Let us know!
How about we high schoolers about compound interest, balloon payments, etc ?
How about people read what they are signing and get a lawyer to explain it to them if they can't understand it.
How about we stop whining and being crybabies all the time?
I guess you prefer to call others crybabies over education !
As I read the comment the suggestion to stop whining and being crybabies was to be done in conjuntion with eduction - not as a preference to it.
Get it wrong and it will cost you a lot of money
Banks don't have your interests at heart
Believe it or not, people are smart enough to make their own decisions. Liberals need to get off their high horse with their attitude that they can make decisions for others better then they can.
I would argue that adjustable rate loans caused the housing crash and contributed to the meltdown--I know scads of folk who were unable to refinance/sell their homes and quckly became unable to make payments as the 'points' and 'resets' caused payments to move up hundreds of dollars at a time. They defaulted and they lost, we lost, and the greedy loan originators won.
It actually wasn't even a good idea for them, because it helped create the professional entitlement mentality which lofted them just that much above the hoi polloi. This was the same decade which saw the most egregious tax avoidance scams mostly utilized by those same professionals.
It only makes sense to disclose--in dollar amounts--what the payment would be up to the maximum allowable by the mortgage. The corollary is that the borrower should have to prove that in two or however many years when the mortgage resets exactly how they would still qualify for the payment.
Unless you are a surgeon, litigator or the next LeBron James--or the heir to a wealthy relative with one foot in the ICU and the other on a banana peel--you probably shouldn't qualify for an ARM.
How are people to now qualify for homes when their credit rating has been manipulated and shot down by these predators? Who today but the pure and pristine can now walk through those pearly gates to the banks to sign even another disguised ARM?
Unless we can have real regulation based on the needs of majority, not the needs of some investment banker configured on the algorithms of some weird MIT graduate, then - short of religiously stopping usury - we will just have to change the system and nationalize all banks.
Until then, it will always be a simple formula, so-called based on the manipulative value of the dollar: take from the poor and give to the rich.