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
"Your"
Money Matters By Carl Hampton
Author of "From
Credit Despair To Credit Millionaire"
Related links: http://www.LienExchange.com
