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prestonsherwood

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prestonsherwood
August 17, 2012 6:47 pm

The additional communications, as proposed on this site, are a good thing, of and by themselves. However, I believe there is another problem that should be addressed, in addition.

I suspect that many people who take out an ARM do not fully consider the risk of future rate increases. Especially with the currently low rates (and potential for higher long-term inflation), ideally a prospective customer should perform a “stress-test” on their own financial situation, and ask realistically could they afford the loan if rates climb in the long term, and specifically how they would accomplish this. An alert is nice, but the options are far greater before the agreement is signed.

Therefore, my recommendation would be to put equal–or greater–emphasis on clear communication… more »

…and discussion of options before the loans are signed, with a focus on worst-case increases. e.g. “If rates do climb substantially, and your ARM rate goes to it’s highest allowed level of __X%__, your monthly payment would be __$xx,xxx__. In that scenario of higher rates (and likely higher inflation), what would you have to do to ensure you can still make payments?”

Even if the prospective customer doesn’t provide an answer to the loan officer, that might trigger some very useful discussions among spouses, co-signers, etc.

(I assume that lenders would detest such a requirement, but fundamentally we do need to enforce reality-checks at some stage: history and basic logic indicate that the people who are paid to generate loans are not the best guardians of long-term risk.)

Another way to make prospective customers more aware of the risks would be to ask “Assuming your loan payments do increase steadily if rates rise, at what level (of monthly payment dollars) would you need to either sell the house, allow foreclosure, or request modification of terms?” (i.e. how much of an increase could you really afford.) Requiring a prospective borrower do the math might be a useful reality check – even if the person fudges the numbers, at least the issue will have been implanted in their head. « less

Moderator
August 21, 2012 5:26 pm

Hi prestonsherwood, and welcome to Regulation Room! This rule only deals with what happens when people already have a mortgage. CFPB is proposing a separate regulation about pre-disclosure, which you can find here. For people who already have an ARM, do you think the information in CFPB’s proposal makes sure homeowners get the information they need?


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