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?
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click for larger table
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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.
Some
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.
In
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.
“Reduced
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.
Sources:
Federal
Financial Regulators Propose Illustrations of Consumer Information to
Support Their Statement on Subprime Mortgage Lending
Federal Reserve, August 14, 2007
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070814/default.htm
Proposed Illustrations of Consumer Information for Subprime Mortgage Lending
PDF, pages 8 and 9
Federal Reserve, August 3, 2007
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070814/attachment.pdf
hmmm…seems productive. Let’s pass it, so we can repeal it later.
They should just make the lenders portfolio the loans, that’ll right the ship right quick.
Barry, it’s so late that Ray Charles could of seen this coming. Anyone who looks at the monthly graph of resets all the way into 2008 begins to tremble, and at this point, who in America who wanted a house doesn’t have one?
The real kicker on this latest development is that the poor sheeple have been fleeced twice by the FED. The first time it involved Greenspan advising anyone that could fog a mirror to go into the fun and exciting world of exotic mortgages. Not long after he started raising rates. Oppsy…his bad.
Now the poor sheeple who took out these exotic and toxic loans can no longer get what brung em’ there. Now the FED is pulling the very fun and exciting toxic loans so that the sheeple are screwed. They no longer qualify under the new guidelines, and their houses wouldn’t comp out even if they could get a loan.
The cherry on top is that the Banking industry lobby got congress to change the BankrupctyLaw so that they now “mean test”and other fun things before you can do a bankruptcy.
are they calling this regulation:
It Will Cost You an ARM and a Leg?
It will probably help… In 3-5 years…
“and at this point, who in America who wanted a house doesn’t have one?”
Honestly – why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Obviously, there are plenty of people in America who still “want a house”. Of course, there are far fewer than in the past few years. But still a significant number.
Try not to look at things in such stark black and white terms.
Also, the term “sheeple” is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor “sheeple” – all those idiots who are vastly inferior to you.
The irony.
Anyone who would take the ARM would be on crack. I take that back, anyone planning to stay in the home over 28.7 months would be on crack to be precise. This is not mention the higher fees up front for the privelege allowing your payment to go up. (You can always refinance down with little penalty.) This basically is a 36 month balloon, and it should be priced accordingly.
I would say this is way past late. On the other hand, this may signal the bottom in subprime issues.
the bottom on subprime is at least a congressional hearing or three away.
Cue Carole King: “It’s Too Late Baby”.
Also, this seems to me to be a bit smug: a not-so-veiled implication that the borrowers were at fault and not the empty-headed banks and mortgage companies that approved the loans.
Maybe this should be mailed out to loan officers.
At first I thought, wow, I wouldn’t sign the docs for that loan after seeing the price difference. Then I remembered I have a fixed 6% loan. Then I remembered that I used to run a mobile closing company. Then I remembered that nobody looked at their docs … they just signed them. Then I remembered that even after I tried to explain the terms of a loan in such poor terms so as to get the borrower to not sign, they still signed.
So, after I thought about all of that, I realized that the regulation is worthless … just like most of the regulations. There are fools and they will sign anything. Letting the market actually work is about the only solution (I don’t count this last run as a real market since the fed artificially lowered the barriers to entry). The best thing that can happen is that banks require a minimum of 20% down and solid credit. In my humble, loan closing experience, if the borrower is at the point that they can sign a doc, they’re not reading the required warnings. It’s all just initial here, initial here, sign here, and 20 minutes later the deal is done.
I like Option Arms when rates are at or above 15% for Prime borrowers,and prices are reasonable.say 2010 or so.
Oh yeah, and ditto to what slick said. I picture anyone using the term “sheeple” as some high school geek, “making fun” of the “popular” kids and slinging 12 sided dice while calling himself Ancalagon and pretending to slay dwarves in his dungeons and dragons role playing game.
I think they should change the sample mortgage comparison table so that the mortgage payment on the ARM increases in Year 3, not Year 5.
They currently show the payment increasing in Year 5 with a 2% rise in interest rates. They should show interest rates increasing more quickly so that the buyer sees the worst case scenario.
slick,
>> >> “and at this point, who in America who wanted a house doesn’t have one?”
>> Honestly – why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Surely, you know how to parse his statement intelligently and not idiotically interpret it literally, right?
>> Try not to look at things in such stark black and white terms.
Well said.
>> Also, the term “sheeple” is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor “sheeple” – all those idiots who are vastly inferior to you.
Wait. You’ve heard of the bell curve, no? If IQ and education are both on bell curves, where do you think the subprime-and-soon-to-be-foreclosed borrowers fit? Those folks really made life-changing, bad decisions by taking those loans, right? And if SPECTRE isn’t among them, then why is it so outrageous for SPECTRE to refer to them as sheeple?
>> The irony.
You threw SPECTRE under the bus for perceived “arrogance” but in an arrogant way. I see irony, too.
Hmmm…Are you a Fox News supporter prone to condemn the “liberal elite”, even when they happen to be correct?
This guy is always a riot:
~
While being humorous, he also makes an excellent point. The rating agencies, who are as he wrote “always hungry for fees“, knowingly rated these loans as AAA, in exchange for cash.
.
This is rich! montaigne says “There are fools and they will sign anything” but then piles on SPECTRE for using the term “sheeple”.
“Brilliant.”
If I understand what Cal means by “portfolio” the loans, yes, that would probably help. (But, didn’t we have an S&L crisis just the same? At the time, all those S&L’s held the loans on their books. They didn’t resell them.)
The notice is late but it will help. While people sign many forms quickly, many of those forms have long paragraphs of small print. This form is different.
If anyone wants to trivialize presentation issues, compare the marketing collateral to the contracts from the same lender. Obviously, when the lender wants to get a message across, they don’t do it with pages of 8-point font. They do it with larger font and graphics. If they cared about informing consumers about the risks, the most important parts of the contract would look like a brochure. And borrowers would be far more likely to read it.
“and at this point, who in America who wanted a house doesn’t have one?”
Honestly – why do you write such a stupid thing? Surely you can make your point without resorting to such idiocy?
Obviously, there are plenty of people in America who still “want a house”. Of course, there are far fewer than in the past few years. But still a significant number.
Try not to look at things in such stark black and white terms.
Also, the term “sheeple” is a dead giveawway of a poor (yet arrogant) thinker. Ah yes, the poor “sheeple” – all those idiots who are vastly inferior to you.
The irony.
Posted by: slick | Aug 14, 2007 9:35:23 PM
Now I know why your moniker isn’t “smart”, slick. I will discuss any issue you like, but actually have something to say about the subject matter. Share your thoughts regarding the FED and it’s policies, and we will see how you do. So far you aren’t slick. More like slime.
Also the term sheeple has less to do with intelligence, and more to do with human nature and our herding mentality. Got that slick?
Go to this site for the concept of the word sheeple. It’s our human nature to have a herding mentality. It gives us a feeling of security if everyone else is doing whatever to. Bet you my bottom dollar that there are some PhD’s and Master Grads in the bunch. Nothing to do with intelligence. SHEESH!
http://flippersintrouble.blogspot.com/
This, of course, will be of no help. What would help? A truly free market for credit. Enough of the nonsense of the Fed, GSEs, and fractional reserve banking…just one man’s wishes after a few cocktails!
i think the sheeple he’s referring to are gullible, mathematically illiterate, liberals who take 0 responsibility for anything, its the big bad lenders fault with their oh so complex ARMs. throw them out on their arses, chalk it up as a learning experience-
Actually after examining that site again, I’m inclined to state that some of the sheeple really are stupid. In fact most are stupid for believing that you get something for nothing in this world.
They believed that somehow although they make 35K a year, they are entitled to live like a millionaire in a house costing 750K. Is that intelligent?
Honestly, I feel nothing but sadness regarding this train wreck even though everyone concerned deserves what’s coming.
“This is rich! montaigne says “There are fools and they will sign anything” but then piles on SPECTRE for using the term “sheeple”.
“Brilliant.”
Thanks, wunsacon! I have my moments of brilliance.
Moments of finding irony, too:
Your quote:
“Hmmm…Are you a Fox News supporter prone to condemn the “liberal elite”, even when they happen to be correct?”
Followed by this ditty from wikipedia (I know, so inaccurate):
“Sheeple is a term of disparagement, a portmanteau created by combining the words “sheep” and “people”; a reference to herd mentality … The label seems to have originated among conspiracy theorists in the United States of a far right political persuasion. The Wall Street Journal first reported the label in print in 1984, where its reporter encountered the word used by the proprietor of an American Opinion bookstore affiliated with the John Birch Society.[1] In this usage, taxpayers were derided for their perceived blind conformity, as opposed to the conspiracy theorists and tax protesters who thought independently. “Sheeple” are people who pay their taxes and accept what the government and the mass media tell them.[2] A piece of folk poetry circulating among conspiracy theorists puts this usage in a nutshell:
Oh yes, I am a sheeple, and oh so proud to be.
I am way too smart to believe in a conspiracy.[3]
Acceptance of government intrusion and regulation is another hallmark of the “sheeple” according to those who use the epithet.”
http://en.wikipedia.org/wiki/Sheeple
Just an FYI on the history of the term since the old-school FOX crowd is the one from which it originated. Anyway, not a dig or anything like that and maybe you’re older so “sheeple” is “cool.” As I see it, using the term “sheeple” hurts spectre’s points which were good.
“They should just make the lenders portfolio the loans, that’ll right the ship right quick.”
Whoa! Cut out all the fees for the umpteen middlemen? Have you no sympathy for the people on the production lines at BMW?
Yes, way too late. I suppose it will help during the next up cycle, whenever that is.
-K
This sort of regulation tends to always be too late. The damage is done. The marketplace has already corrected.
The short sale uptick rule is a perfect example. It was put into place after it was way too late, ie post 1929 crash and then gets repealed just when you might need it again.
The Onion takes a look at how people are paying off their subprime mortgages.
Free Market for credit? Mark, you are a “sheeple” and a ignorant one at that. When are you going to get terms such as “free market” is intellecual NOT rational. Markets are NEVER free. Never have been and never will be in nature. Somebody will always be in control.
The housing boom like all cycles end. In a “free market” of credit, this SAME THING would happen only much more violently as the players controlling it would leave quicker as they would be profiters. So we have many players trying to save the system connected to the corporate government. No surprise.
FWIW, The John Birch(Jewish FWIW) Society is a sad front of the merchant caste. They should talk about “sheeple”. They are ones.
think the sheeple he’s referring to are gullible, mathematically illiterate, liberals who take 0 responsibility for anything, its the big bad lenders fault with their oh so complex ARMs. throw them out on their arses, chalk it up as a learning experience-
Posted by: Mark | Aug 15, 2007 12:08:28 AM
Exactly! Like it or not, a signed contract is a signed contract. Bite the bullet and chalk it up to the school of hard knocks. There is no free ride in this life.
“Oh yeah, and ditto to what slick said. I picture anyone using the term “sheeple” as some high school geek, “making fun” of the “popular” kids and slinging 12 sided dice while calling himself Ancalagon and pretending to slay dwarves in his dungeons and dragons role playing game.” – montaigne
– – –
Dwarves are generally good creatures so you would more likely be a dwarf than slay one (think Hobbits). Orcs, trolls, goblins and the lot are fair game. Don’t diss the D&D.
FWIW, The John Birch(Jewish FWIW) Society is a sad front of the merchant caste. They should talk about “sheeple”. They are ones.
Posted by: Cherry | Aug 15, 2007 4:44:55 AM
You must be with the Holy Order of The PC Priests. I’m old enough at this point in my life to really not give a rat’s ass concerning what you think. Sheeple refers to anyone stupid enough to think that you get something for nothing in this life, and the same damn fools who expect a bailout when there are no greater fools than themselves.
As a former loan officer, (got out in 2004) It was my experience that the main problem was people’s irrational expectation that home prices would continue to climb indefinately…If they had done so there would be no real issue with these ARMs…in fact they would’ve been a good bet…
The timing is perfect since just about every lender has completely eliminated 2/28’s and most have eliminated 3/27’s. I bet this disclosure won’t be required for anyone with a rate that is fixed for at least 5 years.
One more useless form to add to the library.
I wish they would address how these products can be advertised on television and through telephone solicitations. Some of the ads currently running on television are still promoting the option arm mortgage and the consumer’s ability to shop, shop, shop with the monthly “savings.” It’s appalling.
From Mark:
“i think the sheeple he’s referring to are gullible, mathematically illiterate, liberals who take 0 responsibility for anything, its the big bad lenders fault with their oh so complex ARMs. throw them out on their arses, chalk it up as a learning experience”
From Spectre:
“Actually after examining that site again, I’m inclined to state that some of the sheeple really are stupid. In fact most are stupid for believing that you get something for nothing in this world.
They believed that somehow although they make 35K a year, they are entitled to live like a millionaire in a house costing 750K. Is that intelligent?
Honestly, I feel nothing but sadness regarding this train wreck even though everyone concerned deserves what’s coming.”
——————————-
Seems to me that you guys want to call the people “sheeple” and yet expect them to understand complex mortgage documentation.
If we take it as a given that there is a bell curve of intelligence and “sheeple” live on the low end of that curve, then creating and marketing complex financial products to them strikes me as a very bad idea. These people don’t understand finance – not 401ks, mutual funds, or their mortgage. It therefore might be the job of the government to stop predatory lending practices to stop these companies from abusing those on the low rung of that bell curve.
I think it is fairly obvious that the poor are given more complex financial structures than the rich. ARMs are just the latest example of this. The well-off and well-informed get offered better rates and simpler structures, while the poor, with less knowledge, get marketed an ever increasing variety of relatively complex financial products. While this makes sense in terms of a risk/reward analysis for the lender, it does setup an obvious problem – the most complex products going to the people least able to evaluate them.
Does that mean these people have no responsibility? Of course not – they obviously have to be held to their obligations. And while I don’t support any form of a bailout for anyone in this mess, I realize that the government is likely to step in and try and help. I would just suggest to them that they do not bail out any of the lenders. They can argue that they should help individuals either directly or through Fannie in order to preserve neighborhoods – but I can’t see any argument for helping out the foolish companies.
I find the use of the word “liberal” in the first comment very interesting. We should remember that all this happened since 2000 under the leadership of a Republican president and Congress. I think it also helps to remember that, while the east and west coasts are being hurt by the chain of events (centers of liberalism here in the US), it is middle America – the sheeple – who are most likely to be destroyed by this – just look at what is happening to Detroit’s housing market and you will get a sense of how bad it can be. Combine a poor local economy with crushing housing and you get a truly horrible outcome.
And these new lending standards are a joke: way too little, way too late.
“people’s irrational expectation that home prices would continue to climb indefinately…”
The people in government who’s responsibility it was to warn people and put on the brakes, were too busy telling us how everything was great because of there wisdom and foresight in lowering rates and taxes.
The sheep merely followed the shephard’s to slaughter like they were trained to do.
Short Man- That was hilarious.
Interesting chart but one suggestion I would make is the Year 1 payments in the adjustable mortgage. They are usually at far lower rates. Try 3-4%. Wait till those reset and goto 5-6% and then 7-8 etc…the percentage jump in monthly payments jump far more dramatically which will pinch people out of their homes.
“i think the sheeple he’s referring to are gullible, mathematically illiterate, liberals who take 0 responsibility for anything, its the big bad lenders fault with their oh so complex ARMs. throw them out on their arses, chalk it up as a learning experience-”
T’wasnt Liberals what killed the beast. ‘Twas the Neocon, self-deluded, greed-driven pseudo-conservatives.
Liberals? Indeed.
too late…
In my opinion, they should place a cartoon with that mortgage payment chart… hey, it worked for the military (cartoons that is).
Too little, too late for the average consumer… now people know, that’s how they learn… that’s how people have always learned. Sadly, those moments are usually filled with pain since it is difficult (even for wallstreet, even without any scheister motivation) to price risk.
At the time these people purchased, some were told about the increasing rates, some knew but what they lacked most of all is a simple way to place a value on risk. The only way these people were going to get financially destroyed was if/when the market finally gave in. Next time those that got stung won’t dabble in this type of risk again…
Onward and upward to the next great watering hole. what’s next? Insurance, medical, oh, I know, retirement accounts or whatever the next best thing to sliced bread will be. same pig, different color lipstick.
BTW, sheeple are people too
buy a house – “it’s so easy even sheeple can do it”
Even worse – some of the loan companies inflated the income of the people in order to qualify them for the loan in the first place.
Perhaps this is naive and I’m certainly no expert in this industry, but wouldn’t the simplest solution simply be to make the loan officer or mortgage broker a fiduciary of the borrower? Those of us who work in the financial markets are clearly focused on the subprime sector’s impact on overall credit, but there are real collateral human costs here, too. The reality is that these products are sold to homebuyers with the idea that they will become securities, yet we sell them as if they’re credit cards. I think it’s time to give the banks and mortgage brokers a little more incentive to stand up and fly right, particularly when it comes to potential subprime customers. These are generally not Harvard MBAs we’re talking about here. I’m not sure that charts and plain English are enough.
The “right” people have gotten rich and now it’s time to close the barn door.
I’m not sure where the idea is coming from that poor people are subprime. $50,000 homes aren’t being purchased on 2/28 ARMs, and $650,000 ARM loans aren’t being approved for poor people. An ARM is just disguised bridge financing. This isn’t Europe where it is customary to have large prepayment penalties. There an ARM makes sense because their is an actual discount in rate involved because an implied put for the consumer isn’t in the loan.
For all the talk about how terrible ARMS are, there were a number of investors that used them to flip homes they had no intention of keeping, and they were able to do so for what amounted to be a cheap bridge loan.
Yet another sheet of paper added to the already massive pile of boilerplate that no one ever has the time to read at an actual closing?
No, this won’t help at all.
Unless they also remove some of the useless documents or require this to be seen some time in advance on its own before closing, this will just get lost in the stack.
Those are just awful terms. Permitting an $800 rise in payments in 5 years is ridiculous for 95+% of the house-buying market.
Arms were good for one thing – house flipping. Which means they were good for nothing at all; it just encouraged the artificial inflation of house prices as more and more speculators got into the market. This left “real” homebuyers screwed, having to pay more and more for the same house that cost 30% less a few years ago. They only way to afford it? ARMS. So ARMS encouraged the housing bubble twice, in a self reinforcing cycle that screwed the middle and lower class, and let the people with enough money to speculate make a fortune.
Any speculator who loses their shirt in this deserves it. I hope to see bodies raining from tall buildings any day now. Any sane person could see this was unsustainable, there was no real value increase in the housing market, just a speculation bubble that could only get so big… the tipping point was obvious based on the value of monthly ARM resets. Every sensible speculator got out of this crap a half year ago. They have extracted a fortune in wealth from the middle class, and are now looking for the next speculation bubble to take advantage of. We’ve done banks, stocks and housing now … preciuous metals look likely, or maybe the government and banks will change bond policy to allow more insane terms. Or maybe it will go into trading cards and coins – do you have your “Magic:The Gathering” portfolio strategy ready?
That the banks facilitated this to happen shows the utter stupidity of the the “free market”, and shows the term “sheeple” doesn’t just apply to the great unwashed masses. The upper tier of financial enterprise in this country is completely opinion and fear driven, powered by the vast glut of money the rich in this country have sucked up the past 30 years. They clearly have no intelligent or productive ways of using that wealth anymore – they don’t build factories or create jobs with it anymore, if they ever really did. They just buy shit from each other and artificially inflate its value, dragging the rest of the country with it. Why invest in a long term, complicated project like building a company that actually produces something when there is a 10%-15% yearly return just buying and selling stuff that will increase in value for no other reason that lots of other wealthy people need to throw their money somewhere?
Everyone agrees it’s too little too late. But more importantly why are they focusing on just sub-prime? People with great credit are just as vunerable and unsure when it comes to mortgage loans. It’s almost like they are saying prime people are smart and subprime are dumb and this is not the case. Have you seen the site offerangel.com? They are essentially doing what the govt hasn’t (and may still not be able to do) and it works when people are looking for more than one loan. What many people don’t realize is that it’s not just disclosures. LOAN OFFICERS MANIPULATE THE SYSTEM! So, it doesn’t really matter that there is the new improved disclosure because lenders are “bait and switching” customer all the time. At least with online resources they can track and prohibit bad actors from reaching borrowers, the GFE is only a “good faith” not a promise.