Surprises in Store for ARM Holders

Submitted by Rich Toscano on March 21, 2006 - 9:07pm

Check out the graph at the bottom of this Real Estate Journal article on adjustable rate mortgages. It ends up that many borrowers (nationwide, but if anything I imagine that SoCal is worse) aren't even aware of key facts about their ARMs, such as the cap on individual or overall rate increases, how rate resets are calculated, and more. Pretty amazing.

I imagine that many of these folks never bothered to learn the facts about their resets because they figured they'd sell or refi (for huge profit, or course) before the resets ever took place. Given flat home prices and rising rates, however, that no longer seems like such a great plan.

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Submitted by edna_mode on March 22, 2006 - 10:34am.

Well, dahling, would it be a reasonable time to suggest to our legislators the creation of a standardized disclosure table ("Mortgage Facts"), similar to the "Drug Facts" and "Rates, Fees and other Costs" used for credit cards to allow people to compare and analyze the consequences of purchasing particular mortgages?

The chart next to the graph at the bottom of this article would suggest excellent parameters to start with: Maximum rate to be charged, maximum change in rate, index rate is tied to, original rate and frequency of rate change. I envision a bold, legible table in a large non-seriph font! It will be comprehensive! It will be comprehensible!

And it will productively use the time of said legislators and distract them from nattering away on issues of no consequence, and make them look like they are doing something inventive and constructive. What's not to like?

Submitted by Blissful Ignoramus on March 22, 2006 - 1:09pm.

They don't do that? I've never had a ARM, but in closing on houses I've purchased they go over the mortgage terms in gory detail, including the total payoff, etc. I'm surprised if they aren't required by law to fully disclose those details.

Submitted by edna_mode on March 22, 2006 - 2:08pm.

oh, I make no comment about how complete their disclosure is, in terms of verbal discussion and what is buried in the contract...while I have never had an ARM either, I would assume that there would be a lot less cause for ignorance if the presentation of the essential data were *standardized*, which I assume is not the case currently. You look on the back of any over the counter drug, and you will find the same format of active ingredients, warnings, contraindications, etc. You turn over the offer letter from any credit card and you will find the same table listing APR, grace period, annual fee, etc. The design genius who developed these tables deserves ample reward. The standardized table allows you to put similar products side-by-side and compare them quickly.

Submitted by Blissful Ignoramus on March 22, 2006 - 3:35pm.

No, I mean they go over it verbally in gory detail with you so you can't possibly miss it. What knocks you on the floor is the sum total of payments, which comes out to much more than the amount borrowed, of course.

Anyway, I know only my own experience, none of which is with an ARM, but I would think that they would have to state explicitly what the cap payment would be, and make the customer initial.

Submitted by Larry J. on March 22, 2006 - 6:28pm.

Many ARM (adjustable rate mortgages) loans send out payment statements and it seems that this is the place for the lender to highlight the loan features in a way that is easy for the consumer to monitor.

Some loan statements show an index value that was the index value when the loan was taken out - this could falsely lead to a consumer thinking that there may not be any major adjustments coming up.

It seems as though it would be fairly easy for the servicers of the ARMs to adopt a "best practices" approach to recap the major features and upcoming change dates for the consumer so they don't get blindsided.

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