Now a study by the Government Accountability Office says new standards of consumer education should be required for “alternative mortgage products” or “AMPs” — that’s a fancy term for interest-only loans and option ARMs.

What’s the problem?

Today’s paperwork simply does not work with interest-only and option ARMs. For instance, a typical disclosure statement might say that monthly payments may rise or fall. Such language is literally true — but artfully does not disclose the magnitude of potential payment increases, the idea that monthly payments might double in a few years.

Federal rules at this time do not require special disclosures for interest-only mortgages or option ARMs. Ads for such loan products often focus on low-up front costs rather than all loan terms. When higher monthly costs kick-in borrowers may be faced with stark and unexpected financial choices.

“Although AMPs have increased affordability for some borrowers, they could lead to increased payments or ‘payment shock’ for borrowers,” says the GAO.

The result for many borrowers is that “unless the mortgages are refinanced or the properties sold, AMPs eventually reach points when interest-only and deferred payment periods end and higher, fully amortizing payments begin.”

But what if loans cannot be refinanced? What if properties cannot be sold for enough to pay-off bigger loan balances? As we are seeing, home values do not always rise.

“Many buyers are purchasing with little or nothing down,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the largest online marketplace for foreclosure properties. “Buyers with nontraditional financing in a slow or declining market could easily find themselves with a home which has actually lost value while the mortgage balance has grown substantially.

“After a few years a buyer could be stuck with unaffordable monthly costs plus a home that cannot be sold for enough money to pay off the mortgage. When you look at the risks associated with interest-only mortgages and option ARMs — loans that together now represent more than 70 percent of all new mortgage originations — you have to wonder why more disclosure is being studied and debated when the immediate need is obvious.”

Once “start” rates for interest-only and option ARMs end a significant number of borrowers will be unable to make monthly payments. How many borrowers? No one knows.

“Because the monthly payments for most AMPs originated between 2003 and 2005 have not reset to cover both interest and principal,” explains the GAO, “it is too soon to tell to what extent payment shocks would result in increased delinquencies or foreclosures for borrowers and in losses for banks.”

Put it all together and you have armies of borrowers with loans they don’t understand. In too many cases, you also have borrowers with loans they will be unable to repay.

A borrower with option financing can typically make monthly payments sufficient to amortize (pay off) the loan in 30 years. Or, by making bigger monthly payments, the borrower could pay off the entire loan in 15 years.

Alternatively, option financing also allow the borrower to make interest-only payments during the first few years of the loan term. Lastly, option financing allows borrowers to make low payments during the first years of the loan that do not even cover the cost of interest. The interest not paid is added to the loan balance each month, a process called “negative amortization.” Of course, as the debt grows so do interest costs.

The GAO offers this example:

Someone gets a $400,000 option ARM. The loan has a 4.41 percent initial interest rate, however during the five-year start period the borrower can pay as if the interest level is just 1 percent. Required monthly payments during the start period can be increased no more 7.5 percent a year.

Here’s how the monthly payments and loan balance change for a borrower who only makes the minimum payment.

If you look at the chart you can see that by the start of the sixth year the monthly payment has more than doubled. However, an option ARM is an adjustable-rate loan product. The chart assumes that the interest rate does not change. In the real world, the interest rate over a five-year period could easily rise or fall. If it falls, no problem. If rates rise, then negative amortization could increase substantially and future monthly payments would rise sharply.

“There’s no reason lenders cannot offer clear and concise brochures that explain the pros and cons of nontraditional financing,” says RealtyTrac’s Saccacio. “Such disclosures could detail how interest-only and option ARM financing increase affordability. With equivalent space and the use of clear charts and graphs the same brochures could also describe the potential costs and risks.

“Current loan disclosure forms do not fully outline the potential risks associated with interest-only mortgages and options ARMs,” he continued. “Even if borrowers read today’s disclosure forms from end-to-end they will not find needed loan information or illustrations. The result is more risk for borrowers — and that means more and unnecessary risk for lenders and mortgage investors.”

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Published originally by RealtyTrac.com during October 2006 and posted with permission.

It’s Time To Raise Loan Disclosure Standards is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Allow me to confess that I am one of those opposed to tax-relief for the rich, my thinking being that our gilded elite have gained more from the existence of decent government than the poor and middle class. If this seems like a questionable theory, consider what a lack of government has created in the streets of Baghdad — and also consider that under a government run by and for psychotics no one is safe, even though there is an illusion of order and security.

Thus I oppose an end to estate and dividend taxes. Ridiculously few people pay the estate tax, those who do pay it should, and in many cases dividends already go into retirement accounts and remain untaxed until withdrawal.

Is there anything about the tax debate which might be generally agreeable? Here’s an idea.

The IRS has created an excellent Web page — Tax Information for Members of the U.S. Armed Forces — which explains tax issues for those now on active duty. There are a huge number of rules, most of which greatly benefit those now fighting overseas.

But when you look at the forms, deductions, exceptions, alternatives, and deadlines you have to wonder: Why are we asking military people to pay taxes at all?

Conservatives often believe that taxes should be reduced because cash is the fuel which permits government expansion — cut tax revenues and you also cut the size of the government. As well, many conservatives believe that since the rich pay most of the taxes, they should benefit most from reductions, reductions which will fuel economic growth in general. Liberals routinely argue that tax cuts are fine as long as they are “revenue neutral” and benefit the poor and middle classes, the folks with the fewest economic choices.

If there is an itch to cut taxes and enjoy the wonders of growing deficits, why not please both conservatives and liberals and do something which actually makes sense: End the taxation of military incomes.

We don’t pay much to members of the military in terms of cash salaries and that’s absurd — leading officials at Freddie Mac, Fannie Mae, Enron, Wall Street “analysts,” and trial attorneys have been far-better compensated and look how much they have helped the country. It seems terribly short-sighted to believe that we can combine an all-volunteer military with a minimum wage and continue to attract an ongoing stream of qualified personnel to do the country’s important and dangerous work.

So why not make all military wages go further? Increase military pay now, today, by simply making it tax free. No forms, no deductions, no deadline, no accountants, no exceptions and no paperwork. The value of military salaries would automatically rise, making service more attractive. And for those who favor fewer dollars for government, a tax cut for service personnel in the armed forces would do just that.

Tax-free military incomes would make federal service more attractive and lift many military families out of poverty — a national disgrace. In terms of real estate, combine a tax-free income with VA mortgages and members of the military could afford bigger mortgages and better housing — results which benefit us all. And while we’re at it, let’s gut home sale regulations which unfairly tax members of the military stationed overseas for lengthy periods.

So write your nearby representative or senator and see what they have to say — it will be interesting to see who opposes an idea which is no more than a decent thing to do and in the country’s best interest.

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Published originally by Realty Times on April 22, 2003 and posted with permission.

Let’s Make Military Incomes Tax-Free is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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The current theory seems to be that a consumer can sign on, sign up, click a few buttons and magically become a real estate client, someone entitled to a bundle of professional brokerage services in exchange for a given fee. Current regulation, in the main, seems to support this arrangement, but are yesterday’s rules sufficient in the face of today’s realities?

It is surely true that consumers are spending money online to buy books, airline tickets and other items. It is equally true that not everything can be done online. For instance, electronic signatures are now legal for most documents — but not all.

In June 2000, federal legislation — the Electronic Signatures in Global and National Commerce Act or “E-Sign” — was enacted to permit the use of electronic signatures. However, as computer and technology lawyer attorney David Millstein points out, “E-Sign now makes it clear that an electronic contract which is formed by using electronic signatures is as legally enforceable as its paper equivalent under most conditions. Note that there are certain exceptions, such as a will or trust, which must continue to be executed with a handwritten signature and retained in paper format. In addition, entering into an electronic transaction is an entirely voluntary endeavor, as a party may choose not to conduct business online.” (See: Make your electronic transactions enforceable agreements, The Albany Business Review, March 28, 2003)

Given their enormous importance should real estate listing agreements, sale contracts and related documents be enforceable when created online? Or should they be treated like wills and trusts and require actual paperwork and signatures?

The assumption that an online form is automatically binding may or may not be true — it is at least necessary to look at state rules. The question then becomes, which state? The state where the site owner is located? The state where the consumer pressed the button? The state where the server is located? And if the consumer is overseas, then which country’s laws apply?

It’s a routine matter for authorities to determine what professionals in a given field can do or not do, to establish the rules of the game. Such rules apply universally to all of those who are regulated and are designed to protect the public interest.

Given this brief background a number of questions regarding instant online contracts for realty services are beginning to emerge:

• Do consumers have enough information to instantly enter into a binding contractual agreement online with a real estate broker which may cost them thousands of dollars?
• Is it in the public interest to have consumers instantly and immediately commit to binding contractual arrangements which may substantially impact where they live for decades?
• What happens if a consumer fills out forms on several sites?
• If Mr. Green pushes an online button but Mrs. Green does not, is either Green a client?
• In the age of identity theft and online “spoofing,” how do we know Green signed up with anyone?
• Were the price and terms of the online agreement negotiated?
• Should consumers be advised to consult an attorney before signing up?
• What if a consumer simply presses the wrong button — is there a no-penalty cooling-off period during which time the broker has to cement the agreement in writing? If yes, how long is the amnesty period? If there is an amnesty period, should it not be the same for all brokers in each state? What notifications are received by the consumer?
• Does broker Smith have the right to give the consumer’s name and information to other licensees without the consumer’s express permission? Should there be a separate and adequate permission form consumers must complete?
• What about privacy? Must consumers be told if broker Smith will allow the use of their data by others? If consumers object to such arrangements can they opt out?
• Suppose the consumer does not like the broker? Must the consumer continue to work with the broker? For how long?
• What about the use of online disclaimers? How much protection can consumers get if links to disclaimers are in microscopic type at the bottom of web pages, disclaimers written in dense legalese and typefaces which demonstrate new advances in miniaturization? Should there be a minimum type-size requirement? A required page location?

The Broker’s Perspective

Given their client obligations, do brokers under the current system have enough information to serve the needs of someone pressing an online button? Can a broker “decline” to serve someone who signs-up online? Can the decision to reject a prospective client be seen as discriminatory? What if the person signing up is age 17 — has the broker made an agreement which a minor can enforce but a broker cannot? What if a buyer wants the broker to find a $50,000 property in a community of million-dollar homes?

But wait: If push-button contractual relationships were banned will brokers be able to obtain listings, buyer brokerage agreements and referrals online?

Business was generated before the emergence of instant online agreements — sites with good content and marketing attracted public interest and such interest lead to broker/client relationships and referral fees. But unlike today’s situation, consumers were not tied into contractual relationships with the press of a button.

Instead, brokers and consumers developed relationships individually over time. Questions were asked and answers given. In effect, traditional practices recognize that all realty transactions are unique, that all buyers and sellers are different, that brokers are distinctive, and that listing agreements are negotiable.

Consumer Groups

Does anyone honestly believe that consumer groups are not going to take a new and profound interest in real estate matters if instant online agreements become common? Will trial attorneys question the use of instant online agreements? Would it not be better for real estate regulators to address this issue now, before it becomes a consumer issue, a media staple, a court case or a federal matter “requiring” HUD involvement?

The time has come for state realty commissions to determine whether the public interest is protected with the creation of instant “client” relationships. Should binding online broker contracts be prohibited or allowed? If allowed, under what terms and conditions? Should there be a requirement to negotiate online terms and conditions? Should brokers be allowed to transfer consumer information captured online without separate and express permission?

Both brokers and consumers need clear and settled answers to these questions, otherwise enterprising attorneys and consumer groups may well ask if instant online forms are worth the paper they could be written on. No less important, the answers are needed now, before the industry adopts or declines given online policies.

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Published originally by Realty Times on April 15, 2003 and posted with permission.

Should States Ban Instant Online Real Estate Contracts? is a post from: Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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