by
Carl Hampton
10/27/2006
There have been some recent changes
regarding federal loan payment options. A
“guidance” report was published on
September 29, 2006 that spoke on the issue
of mortgage payment options available to the
public. The Federal Reserve, the Office of
Comptroller of the Currency, the Federal
Deposit Insurance Corp, the National Credit
Union Administration, and the Office of
Thrift Supervision all contributed to the
the “guidance” report.
Each of the regulators mentioned above
acknowledged that both, interest-only
mortgages and the popular payment option
(also called Pick and Pay) are legitimate
forms of home financing. The popular payment
option (Pick and Pay) allows the borrower to
chose which level of monthly payments they
wish to pay. This would normally give them
the option to pay, Interest Only this option
does not reduce the principal balance that
is owed on the mortgage. This allows you to
dodge the principal reduction by cutting the
payments from the first three to ten years.
At the end of that period the borrowers have
the same balance they started with but then
they have higher payments to reduce the debt
over a shorter time frame. Then there is the
fully-amortizing plan (P & I) that
includes both the interest and the
principal.
The regulators pointed out so long as the
borrowers know what they are getting into,
either of these loans are fine. However
lenders tend to mass market the loans with a
variety of add ons and it could be a bad
combination. The government can foresee that
there are problems lenders should try to
avoid.
According to the report the biggest issue
lenders should want to stay away from is
lending to those who cannot support the full
cost of the loan. When a mortgage is
extended at a rate of 1% or 2% when we are
in a market of 6.5% to 7%, that is
acceptable the report said. However that
only works if the borrower can afford the
repayments at the higher level if and when
they become due. If they can't then
extending the mortgage becomes a big
problem. The report pointed out that just
because the borrower can make the first few
payments does not mean they can really
afford the loan.
Lenders need to have documentation of the
applicants' income and assets. This is often
difficult to do for those that are self
employed. Stated income underwriting makes
payment-options and interest-only loans a
very risky venture. If the bank does not
confirm information that the borrower is
claiming to be true then the lenders should
be weary of future problems with the loan.
Piggyback plans sound good but can and
normally are very damaging to the borrower.
For example a borrower can apply for a
payment option first mortgage of 80% and
then open a line of interest-only credit for
the other 20% of the property value. They
will pay nothing down and have no monthly
payment. But when those payments do kick in,
it can and will be a huge payment shock.
Lenders should be conscious of whether the
borrower will occupy the property or not. If
the borrower did not plan on living at the
property the chances are higher that it
could go into foreclosure or default.
Have an opinion or a question you would like
me to answer, then write me!
http://www.CarlHampton.com
