Should We Consider Outlawing Adjustable Rate Mortgages & Foreclosures?

I recently watched a news segment where a woman was interviewed about the foreclosure proceedings currently under way against her property. In the segment, the news organization stated that the couple first purchased their home in 1967 and paid it off under the terms of their original mortgage and then, (I don't remember exactly) somewhere around 2002 they took out an adjustable rate home improvement loan to fix up their house. Within a few years, her husband was diagnosed with cancer, lost his job and is still to this day, immobilized and wheel chair bound. Shortly after her husband's diagnoses, she too came down with cancer and is currently undergoing treatment for it. To make a long story short, about a year ago their mortgage payment increased by more than $600 per month due to the adjustable rate feature. Needless to say, they have fallen behind in their payments and next month their home is scheduled to be repossessed by the bank. What a disgrace!

I really believe that there must be a better way to manage mortgage debt than to go around throwing people out of their homes. Furthermore, wasn't it "sub-prime" and "adjustable rate" mortgages that created this housing bubble in the first place? Wasn't it those "pipe dream" loans that the banks knew couldn't be repaid and took out insurance against, the instruments used to create derivatives and mortgage backed securities that caused the melt down?

I'm not trying to say that banks shouldn't have a means by which to recapture their loses, only that people should not be left homeless due to predatory lending practices. I believe that there are two things that could be done that would drastically reduce the number of foreclosures nationwide while still insuring that lenders don't get left holding the bag.

First, I would propose outlawing adjustable rate mortgages entirely. Fixed rate loans only, that everyone understands with no future surprises. Anything less is just a gimmick created by the big banks on Wall St. to perpetuate their ability to "flip" these homes again and again. What happened to a fair loan at a fair rate for a designated period of time resulting in home ownership by the purchasers?

Second, I would propose eliminating foreclosures and replace them with "mechanic's liens." This would insure that the banks maintain a lien on the unpaid portion of a mortgage. When the house is sold, for any reason, the banks recover the amount of their lien first, right off the top of the proceeds from the sale. This doesn't just stop people from being thrown out of their homes, it also creates an incentive for the banks to be more careful about who they qualify for loans because they would know that they can no longer just "flip" the house to a new buyer, but must instead wait for the "mechanic's lien" to pay off in order to recover their loses. I'd bet that these NINJA, (No Income, No Job or Assets) loans would be a thing of the past entirely.

How about it ATS, I'm open for thoughts.

reply to post by Flatfish


so if I stop making payments I can't be kicked out ? I get to stay in my home forever after closing on my no money down mortgage without making one payment ?

I hate to defend the bank, but if they don't get paid, they fail and we have to save up $500,000 in cash to buy a home

I am for regulating the derivatives industry tho, they are the definition of "toxic"

While I agree with you in principal, some of the responsibility must be held by those that seek out and sign up for these loans.

If you can't do basic math don't get a credit card, much less a variable rate home loan. Read paperwork thoroughly before signing anything. Don't sign up for "variable rate" anything - it's a trap.

I have always managed my finances very carefully. I make good money and I drive a 2005 economy car that I bought with cash in 2006. People ask me why I don't go out and spend 40k on a new, fancier car..

If you can't pay in cash you probably can't afford it. Learn and live this rule and don't sell yourself to some corporate entity. That's what loans are.

reply to post by Flatfish

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

That's a blind one sided argument, do you have a mortgage? I "inherited" my parents' house when they died, not my "choice", but I learned real fast how corrupt the banks and the entire system really is.

For one most mortgage companies' service reps are overseas, try talking to someone from India when they can hardly speak English. They never return calls OR follow their own policies and procedures, and they change the rules whenever they want without notice.

Get yourself a mortgage and see how awesome it is to get screwed over.

I could understand greater regulation and the end of the ARM, but most people don't actually own their homes; the bank ownes them. If an occupier fails to pay, they can no longer occupy. I know it isn't pretty, but how is morally wrong? If my neighbor can stop paying for their house and buys a nice car instead or goes on vacation, well; what if I want to go on vacation or buy a nicer car? I guess I should just stop paying my loan too.
Foreclosure is a necessary and unfortunate reality.
I bought less home than I could afford two years before the crisis. There were some job shifts that made life tense during the crisis, but we could pay every month because we weren't living at our limit and had some savings. Now we are getting ready to level up and can only hope the market supports our getting a decent return on our current property. We knew going in that if the market crumpled we might end up stuck in this house longer than we intended. But, we preferred that risk to the risk of not being able to maintain our obligations and our home.

Originally posted by syrinx high priest
reply to post by Flatfish

 

so if I stop making payments I can't be kicked out ? I get to stay in my home forever after closing on my no money down mortgage without making one payment ?

I hate to defend the bank, but if they don't get paid, they fail and we have to save up $500,000 in cash to buy a home

I am for regulating the derivatives industry tho, they are the definition of "toxic"

When a mechanic fixes someone's car and they're unable to pay, he doesn't get to repossess their car. When a contractor does a re-modeling job on a house and doesn't get paid, he doesn't get to repossess the house. Why should a bank be any different?

Furthermore, I never said you could live there for free, unless it was due to uncontrollable circumstances like those described in the news segment that I mentioned in the OP. If you were employed, I believe that they could attach a designated portion of your wages in lieu of payment. This also creates an incentive for the homeowner to manage the debt or sell the house and repay the bank, but they are not thrown into the streets.

Originally posted by TinkerHaus
While I agree with you in principal, some of the responsibility must be held by those that seek out and sign up for these loans.

If you can't do basic math don't get a credit card, much less a variable rate home loan. Read paperwork thoroughly before signing anything. Don't sign up for "variable rate" anything - it's a trap.

My point exactly. If we agree that "variable rate" anything is a "trap," why do we allow it to exist? It's nothing more than a clever trap designed by the banks to rob people of their equity in their homes.

Originally posted by Flatfish

Originally posted by syrinx high priest
reply to post by Flatfish

 

so if I stop making payments I can't be kicked out ? I get to stay in my home forever after closing on my no money down mortgage without making one payment ?

I hate to defend the bank, but if they don't get paid, they fail and we have to save up $500,000 in cash to buy a home

I am for regulating the derivatives industry tho, they are the definition of "toxic"

When a mechanic fixes someone's car and they're unable to pay, he doesn't get to repossess their car. When a contractor does a re-modeling job on a house and doesn't get paid, he doesn't get to repossess the house. Why should a bank be any different?

Furthermore, I never said you could live there for free, unless it was due to uncontrollable circumstances like those described in the news segment that I mentioned in the OP. If you were employed, I believe that they could attach a designated portion of your wages in lieu of payment. This also creates an incentive for the homeowner to manage the debt or sell the house and repay the bank, but they are not thrown into the streets.

The defacto reason that mechanics and contractors don't get to take possession of the property in question is because another party already *owns* it. In the case of foreclosure it is the actual *owner* of the property simply reclaiming it for failure of the tenant to pay.

Originally posted by JibbyJedi

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

That's a blind one sided argument, do you have a mortgage? I "inherited" my parents' house when they died, not my "choice", but I learned real fast how corrupt the banks and the entire system really is.

For one most mortgage companies' service reps are overseas, try talking to someone from India when they can hardly speak English. They never return calls OR follow their own policies and procedures, and they change the rules whenever they want without notice.

Get yourself a mortgage and see how awesome it is to get screwed over.

Oh good grief.
Yes, I have gone through the process many times.
What is your problem?
I was presented with a fixed, adjustable, balloon and all the others.
I waited, saved and researched.

Inherited? Ok. No one forced you to take it. You could have turned it over to the bank, Govt or donated it.
There will be no river cried for you.

I agree that people bear a certain level of responsibility for the decisions they make and the agreements they sign. That said, however, the playing field needs to be a level one and it is far from that. My wife has been a real estate paralegal for almost 20yrs. From her first-hand exerience banks and mortgage companies intentionally obscure the language so a resonably well eductaed person is hard-pressed to truly understand the conditions and potential ramifications of the loan. Mortgage brokers intentionally mislead borrowers in order to get the highest possible commission. The entire process is frought with inequities.

If I were king of the world, a bank would be required to hold any mortgage they underwrite. Derivatives are a scam and we already know where that took us. Foreclosure should be an option of last resort. Look at all the people who lost their homes through foreclosure because they lost their jobs in large part due to the actions of the very people who held their mortgages. These properties were abandoned, deteriorating and in some cases bulldozed. They languish on the market exacerbating the problem. In Las Vegas, one of the hardest hit areas, there is a new home building boom because potential buyers won't touch the thousands of abandoned, foreclosed homes which have been overrun with all manner of pests.

Under the circumstances, wouldn't it have been financially more prudent to allow these people to stay in these homes? The banks lost a significant part of their investment anyway (and more daily). Wouldn't it have made more sense to work out some long term solution with the owners of the property? Not to mention, doing what they did collapsed the housing market and rendered a great many people credit unworthy essentailly killing-off a large chunk of their potential customer base.

If you recall from the very earliest days of the collapse, the loudest 'expert' voices were pointing the finger at buyers who were 'over their head' and never should have bought a house in the first place. An unvarnished attempt to distract people from the real culprits. The trend to mega-banks, derivatives, selling debt, etc. is what screwed us all. We need to get back to community banking. These are the institutions that weathered the storm and took no bailouts. They didn't need them. And it's where all of us should be banking. Screw BoA, Morgan, Chase, Wells Fargo, Citi and the rest. Close them all down.

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

The real "instant gratification" is being had by the banks and not by the homeowners. The banks knew this was inevitable, that's why they took out insurance against it. They figured they would end up with both, the insurance payoff, which turned out to be taxpayer bailouts because even the insurer, (AIG) couldn't cover the loses, as well as the repossessed homes, which they could "flip" and do it again.

It's "Predatory Lending," plain and simple and IMO, it should be eliminated. Unless of course, you enjoy picking up the tab for it.

ARMs should be illegal. When they call it "predatory lending" they aren't kidding. It a scam by the banks to screw the consumer.

In September 1991, the Government Accountability Office (GAO) released a study of Adjustable Rate Mortgages[9] in the United States which found between 20% - 25% of the ARM loans out of the estimated 12 million at the time contained Interest Rate Errors. A former federal mortgage banking auditor estimated these mistakes created at least $10 billion in net overcharges to American homeowners. Such errors occurred when the related mortgage servicer selected the incorrect index date, used an incorrect margin, or ignored interest rate change caps.

In July 1994, Consumer Loan Advocates, a nonprofit mortgage auditing firm announced[10] that as many as 18% of Adjustable Rate Mortgages have errors costing the borrower more than $5,000 in interest overcharges.

In December 1995, a study by the Federal Savings and Loan Insurance Corporation (FSLIC) concluded that 50% - 60% of all Adjustable Rate Mortgages in the United States contain an error regarding the variable interest rate charged to the homeowner.[11] The study estimated the total amount of interest overcharged to borrowers was in excess of $8 billion. Inadequate computer programs, incorrect completion of documents and calculation errors were cited as the major causes of interest rate overcharges. No other government studies have been conducted into ARM interest overcharges. (from wikipedia.org/wiki/Adjustable-rate_mortgage)

Any time the bank makes an error, it's always in it's favor. In some regions, the only kind of loan available are ARMs, predatory lenders descend on poorer neighborhoods and run their scam until homes that were once worth 100,000 now sell for 20,000 and still get foreclosed on. The language used in these documents would require a PhD in economics to decipher, and they attach them to indexes that are so arcane it gives the back great leeway to adjust the interest rates and balloon payments to just about whatever they want.

reply to post by macman


Listen, especially you folks who like to refinance your mortgage.... they change the rules whenever they want! What are you going to do about it? Nothing, you are nothing to them, numbers on paper, and if THEY make a mistake, it can take months to resolve! That's what I'm talking about.

I refinanced 3X in 10 years, the last time was because I fell behind due to employment issues, it happens.
I only had a cell phone at the time, so waiting on hold for over an hour on daytime minutes can become costly.
When you do finally get a hold of Habib in India, most of the time they can speak about 10% English and one gets nowhere with them basically. I waited 4 months to speak to an English service rep. and still their mistakes were never corrected.

When I signed my name on their contracts for $XXXX amount per month, the 1st bill I got was $100 more than what I signed to pay. Then 2 months later it went up another $200 and they claimed it was because they under estimated the taxes. Now I'm at $300 more per month than I signed on for.
Now 6 months later I get a double bill and only paid for the single pmt, their mistake, went uncorrected for months despite my $200 cell phone bills trying to get in touch with them about it.

Just one small example of how ridiculous their terms change frequently, they are so massive in size that the little guys get no attention.

reply to post by jtma508


Very well put and I couldn't agree with you more. I just watched a commercial two nights ago by one of the big housing lenders where they actually promoted their adjustable rate mortgages by saying that you shouldn't be concerned with rate that will go up in six years because you probably won't even live there by the time it does. Go figure. Anyway, thanks for the input.

P.S. I definitely agree that banks should be forced to carry the loans they make to full maturity as well. This would insure that they be much more careful and selective with respect to the loans they make.

Originally posted by Flatfish

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

The real "instant gratification" is being had by the banks and not by the homeowners. The banks knew this was inevitable, that's why they took out insurance against it. They figured they would end up with both, the insurance payoff, which turned out to be taxpayer bailouts because even the insurer, (AIG) couldn't cover the loses, as well as the repossessed homes, which they could "flip" and do it again.

It's "Predatory Lending," plain and simple and IMO, it should be eliminated. Unless of course, you enjoy picking up the tab for it.

In these scenarios, small mortgage brokers (often affiliated with a nation wide brand but in the same way fast food restaurants are affliated but individually owned) wrote up the deals and then sold them. The large banks that bought them were often as victimized by obfuscating mortgage brokers as any home buyers were.
These little guys set up shop via deregulation of the banking/mortgage field and then they took the money and run.

Selling them off overseas as derivatives, yes; that was the big guys. But only after they had already been hoodwinked into buying them by small time brokers.

reply to post by Blackmarketeer


That's what I'm talking about. I didn't know about the study or the article revealing it's findings and I thank you for posting it. I think this is part of what the Wall St. protest is all about. It's time to bring fairness back into home buying and put a stop to predatory lending.

Originally posted by Flatfish

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

The real "instant gratification" is being had by the banks and not by the homeowners. The banks knew this was inevitable, that's why they took out insurance against it. They figured they would end up with both, the insurance payoff, which turned out to be taxpayer bailouts because even the insurer, (AIG) couldn't cover the loses, as well as the repossessed homes, which they could "flip" and do it again.

It's "Predatory Lending," plain and simple and IMO, it should be eliminated. Unless of course, you enjoy picking up the tab for it.

Yeah yeah, and sure sure.

Free will. You have the freedom to make stupid/dumb choices.
The tax payer should not be left holding the bag. Either way.

The fact that people made poor decisions is that, poor decisions.
The fact that banks push this is a big DUH!! It makes them money, and that is what the bank's primary goal is to do.
The fact that they covered their butt with the insurance is neither here nor there. That is a big DUH as well.

This is akin to liking fire (The Banks) and what it brings, heat, security and abilities. You bring the fire in the house, but fail to learn about it, use it correctly or secure it. Then the fire burns your house down.
You scream "Damn that fire!!!"

The Govt should not have bailed any bank out. The banks are not held to deal with the problem, and neither is the consumer.

Originally posted by macman
Yeah yeah, and sure sure.

Free will. You have the freedom to make stupid/dumb choices.
The tax payer should not be left holding the bag. Either way.

The fact that people made poor decisions is that, poor decisions.
The fact that banks push this is a big DUH!! It makes them money, and that is what the bank's primary goal is to do.
The fact that they covered their butt with the insurance is neither here nor there. That is a big DUH as well.

This is akin to liking fire (The Banks) and what it brings, heat, security and abilities. You bring the fire in the house, but fail to learn about it, use it correctly or use it correctly. Then the fire burns your house down.
You scream "Damn that fire!!!"

The Govt should not have bailed any bank out. The banks are not held to deal with the problem, and neither is the consumer.

My point is that the real "Dumb & Stupid" thing that was done was for us to allow predatory lending to even exist in the first place. I mean who got left holding the bag? It sure as hell wasn't the banks. What we should have done is taken over the banks when we bought and paid for them during the bailout.

Originally posted by Flatfish

Originally posted by macman

Originally posted by Flatfish

Originally posted by macman
reply to post by Flatfish

 

No.
Buyer beware.

The dumbing down of society and the want for instant gratification is at blame.
People were presented with a choice.
Either save to buy the house they could afford on a fixed interest rate.
Or buy now at an adjustable ARM after 5 years, in hopes that they could either flip the house and/or borrow against it again.

Looks like they chose wrong.

The real "instant gratification" is being had by the banks and not by the homeowners. The banks knew this was inevitable, that's why they took out insurance against it. They figured they would end up with both, the insurance payoff, which turned out to be taxpayer bailouts because even the insurer, (AIG) couldn't cover the loses, as well as the repossessed homes, which they could "flip" and do it again.

It's "Predatory Lending," plain and simple and IMO, it should be eliminated. Unless of course, you enjoy picking up the tab for it.

Yeah yeah, and sure sure.

Free will. You have the freedom to make stupid/dumb choices.
The tax payer should not be left holding the bag. Either way.

The fact that people made poor decisions is that, poor decisions.
The fact that banks push this is a big DUH!! It makes them money, and that is what the bank's primary goal is to do.
The fact that they covered their butt with the insurance is neither here nor there. That is a big DUH as well.

This is akin to liking fire (The Banks) and what it brings, heat, security and abilities. You bring the fire in the house, but fail to learn about it, use it correctly or use it correctly. Then the fire burns your house down.
You scream "Damn that fire!!!"

The Govt should not have bailed any bank out. The banks are not held to deal with the problem, and neither is the consumer.

My point is that the real "Dumb & Stupid" thing that was done was for us to allow predatory lending to even exist in the first place. I mean who got left holding the bag? It sure as hell wasn't the banks. What we should have done is taken over the banks when we bought and paid for them during the bailout.

Ok, we agree that the tax payer should not foot the bill, forced by Govt, in turn paying favors to banks .

But, the choice was still made by the person. Period.
This is a path to more Govt control.
In a booming voice the all knowing Govt states "Thou shall not make dumb decisions".
No, the Govt should not be outlawing dumb choices.
Sorry. More control does not come close to better control.