To be filed under "Better-Late-Than-Never" regulatory actions: The Federal Reserve is considering the following changes in Sub-Prime lending disclosures:
The federal financial regulatory agencies today issued proposed illustrations
of consumer information for certain adjustable-rate mortgage (ARM) products
described in the agencies’ Statement on Subprime Mortgage Lending (Subprime
Statement), effective July 10, 2007. The Subprime Statement recommends
communications that ensure consumers have clear, balanced, and timely
information about the relative benefits and risks of certain ARM products. The
illustrations are intended to assist institutions in providing this information.
(Below is a table of the proposed changes)
So is this a case of too-little-too-late, or might this actually accomplish something positive?
What say ye?
The rest of the proposed changes are after the jump . . .
Here is the text version:
Important Facts About Your Adjustable Rate Mortgage
Whether you are buying a house or refinancing your mortgage, this
information can help you decide if an adjustable rate mortgage (ARM) is
right for you. ARMs can be complicated. If you do not understand how
they work, you should not sign any loan contracts, and you might want
to consider other loans.
With an ARM, the interest rate on your loan is not fixed. Instead,
it changes over time according to a formula – typically, a base
interest rate (index) plus a certain percent (margin) (for example, the
Prime Rate plus 3 percent). So, if the base interest rate increases,
your interest rate and monthly payment will also increase.
Some specific terms of your ARM loan are explained below.
►Your loan will have a reduced initial interest rate.
ARMs have a reduced interest rate (start rate) for a short period of
time – for example, the first two years of the loan. This rate is less
than the index plus margin rate. This means that your interest rate and
monthly payments will be lower than normal for the first two years.
However, your interest rate and monthly payment may increase
significantly when that period is over – even if market rates stay the
same. And, your interest rate and monthly payment will increase even
more if market rates rise.
►Your monthly payment will not include an amount to cover taxes and insurance.
some mortgages, your monthly payment includes both principal and
interest and an amount to cover real estate taxes and home insurance –
and your lender pays your taxes and insurance out of these funds. In
other mortgages, your monthly payment covers only principal and
interest, and you are responsible for paying real estate taxes and
insurance premiums when the bills arrive. When you are comparing
mortgages, or deciding whether you can afford a mortgage, you need to
consider whether or not the monthly payment includes an amount to cover
estimated taxes and insurance.
►You will be required to pay a prepayment penalty if you pay off
your loan more than 60 days before the initial interest rate is
adjusted. The amount of the penalty will be a percentage of the
outstanding balance of the loan.
Some ARMs require you to pay a
large prepayment penalty if you sell your home or refinance during the
first few years of the loan. A prepayment penalty can make it
difficult, or very expensive, to sell your home or refinance – which
you may need to do if your interest rate, and therefore your payment,
is about to increase significantly.
►Your loan will have a balloon payment.
Most mortgages are
set up so that you pay off the loan gradually by the monthly payments
that you make over the loan term (for example, 30 years). Some ARMs,
however, are set up with “balloon payments” – you make the same monthly
payments that you would for a 30-year loan, but after a shorter period
of time (for example, 10 years), the entire remaining balance of the
loan is due. When the balloon payment is due you will usually need to
refinance your loan to pay it, or sell your home if you cannot
refinance the loan.
►Your loan will have a higher price because of reduced documentation.
documentation” or “stated income” loans usually have higher interest
rates or other costs compared to “full documentation” loans available
if you document your income, assets, and liabilities. These higher
costs can be substantial.
Financial Regulators Propose Illustrations of Consumer Information to
Support Their Statement on Subprime Mortgage Lending
Federal Reserve, August 14, 2007
Proposed Illustrations of Consumer Information for Subprime Mortgage Lending
PDF, pages 8 and 9
Federal Reserve, August 3, 2007