- Mortgage Choice Determinants: The Role of Risk and Bank Regulation, Mardi H. Dungey, Firmin Doko Tchatoka, Graeme Wells & Maria Yanotti, Economic Record, Vol. 91, Issue 295, pp. 417–437, 2015 (Paid Access).
- Subprime Governance: Agency Costs in Vertically Integrated Banks and the 2008 Mortgage Crisis, Claudine Madras Gartenberg & Lamar Pierce, Forthcoming in Strategic Management Journal.
- The Role of Contagion in the American Housing Boom, Anthony A. DeFusco, Wenjie Ding, Fernando V. Ferreira & Joseph Gyourko.
- The Federal Reserve: The Weakest Lender of Last Resort Among its Peers, Hal S. Scott.
Tag Archives: lender
Rates up in ARMs
Marriner S. Eccles Federal Reserve Board Building
TheStreet.com quoted me in Fed Hike Means Adjustable Rate Mortgages Will Rise and Increase Monthly Payments. It opens,
The first interest rate hike by the Federal Reserve in nearly a decade means consumers can no longer take advantage of a zero interest rate environment. Particularly challenged will be homeowners who have adjustable rates and stand to face higher mortgage payments.
Record low mortgage rates are set to be thing of the past as the Fed raised rates by 0.25%, which appears to be a nominal amount initially. Of course, consumers need to consider the cumulative effect of the central bank’s decision to increase rates periodically over a span of two to three years. The consecutive rate hikes will affect homeowners with adjustable rate mortgages when they reset, which typically happens once a year.
“The initial interest rate move is very modest and consumers will see a corresponding increase in their credit card and home equity line of credit rates within one to two statement cycles,” said Greg McBride, chief financial analyst for Bankrate, the North Palm Beach, Fla. based financial content company. “The significance is in the potential impact of whatever interest rate hikes are put into effect over the next 18 to 24 months.”
The Fed will continue to raise rates several times next year since yesterday’s move is not a “one and done” move, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa. The Fed will likely follow with a series of three to four rate increases in 2016 if the economy continues to improve. The central bank could raise interest rates to a total of 1.0%, which will cause mortgage rates, auto loans and credit card rates to rise in tandem.
Adjustable rate mortgages, or ARMs, are popular among many younger homeowners, because they typically have lower interest rates than the more common 30-year fixed rate mortgage. Many ARMs are called a 5/1 or 7/1, which means that they are fixed at the introductory interest rate for five or seven years and then readjust every year after that, said David Reiss, a law professor at Brooklyn Law School in N.Y. The new rate is based on an index, such as the prime rate or the London Interbank Offered Rate (LIBOR), as well as a margin on top of that index. LIBOR is used by banks when they are lending money to each other.The prime rate is the interest rate set by individual banks and is usually pegged to the current rate of the federal funds rate, which the Fed increased to 0.25%.
The prime rate is typically used more for home equity lines of credit, said Reiss. LIBOR is typically used more for mortgages like ARMs. The LIBOR “seems to have had already incorporated the Fed’s rate increase as it has gone up 0.20% since early November,” Reiss said.
“The prime rate is influenced by the Fed’s actions,” Reiss said. “We already see that with Wednesday’s announcement that banks are increasing prime to match the Fed’s increase.”
The main disadvantage of an ARM is that the rate is only fixed for a period of five or seven years unlike a 30-year fixed rate mortgage, which means that monthly payments could rise quickly and affect homeowners on a tight budget.
Over the course of the next couple of years, the cumulative effect of a series of interest rate hikes could take an adjustable mortgage rate from 3% to 5%, a home equity line of credit rate from 4% to 6% and a credit card rate from 15% to 17%, said McBride.
“This is where the effect on household budgets becomes more pronounced,” he said.
Homeowners should start researching mortgage rates and refinance out of ARMs and lock into a fixed rate, said McBride. The 0.25% rate increase equals to a payment of $0.25 for every $100 of debt.
Since many factors impact the interest rates of mortgages, consumers need to examine the actual benchmark used by their lender since some existing interest rates already priced in some of the anticipated rise in the federal funds rate, said Reiss. While ARMs expose the borrower to rising interest rates, they typically come with some protection. Interest rates often cannot rise more than a certain amount from year to year, and there is also typically a cap in the increase of interest rates over the life of the loan.
An ARM might have a two point cap for one year increases if the introductory rate of 4% increased to 6% in the sixth year of a 5/1 ARM, he said. That ARM might have a six point cap over the life of the loan, which means a 4% introductory rate can go to no higher than 10% over the life of the loan.
Based upon the current Fed increase of 0.25%, a homeowner with a $200,000 mortgage would pay an additional $40 a month or $500 a year when the rate resets.
“While this is not chump change, it is also not immensely burdensome to many homeowners,” Reiss said. “The bottom line is that it is worth figuring out just how your ARM works so you can understand what your worst case scenario is and then plan for it.”
Down Payment Help
The Dallas Morning News quoted me in Asking for Help with Down Payment Can Often Be Difficult. It reads, in part,
How do you ask a question when no one wants to talk about the subject?
Often, it’s quite clumsily, without much effort at sparking an honest exchange.
* * *
Before asking, hopeful buyers should investigate options, said David Reiss, a real estate professor at The Brooklyn Law School.
“You would want to press your lenders to identify all first-time homebuyer programs you might be eligible for,” Reiss suggested.
The Federal Housing Administration offers loans with low down payments, and many state housing finance agencies offer low or no-down loans to eligible buyers, he noted.
In any case, said Reiss, “It would be helpful to know your options when speaking with family members about a gift.
“They might be willing to give a smaller gift for an FHA mortgage, or they might be willing to make a larger gift if they see that it would result in lower monthly payments for your,” Reiss said.
“And the mere fact you did this type of research is evidence that you are a financially responsible adult,” he concluded.
Equitable Subrogation in Mortgage Refinancing
Professor Freyermuth
I am speaking on Equitable Subrogation in Mortgage Refinancing and Land Purchase Transactions in an ABA Professor’s Corner webinar on Wednesday with Professor Wilson Freyermuth of the University of Missouri School of Law. If this sounds like an esoteric topic, it is!
Subrogation refers to the substitution of one party for another and equitable subrogation refers to the doctrine where a court may use its equitable powers to find an implied assignment of a mortgage in order to avoid the unjust enrichment of a party. Since the commencement of the foreclosure crisis, this doctrine has been put to the test. Wilson and I will take a look at some of the recent cases that do the testing. More info about the webinar is below:
Professors’ Corner
A FREE monthly webinar featuring a panel of law professors, addressing topics of interest to practitioners of real estate and trusts/estates. All are welcome and encouraged to register and participate.
Wednesday, December 9, 2015
12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific
Equitable Subrogation in Mortgage Refinancing and Land Purchase Transactions
Speakers:
David Reiss, Brooklyn Law School
Wilson Freyermuth, University of Missouri School of Law
When a lender makes a mortgage loan to refinance an existing first mortgage, the lender typically expects its refinancing loan to have first priority. If there is an intervening lien on the mortgaged property, however, a priority dispute may result in which the intervening lienholder argues that the recording statutes give it priority over the refinancing lender’s mortgage lien.
In this situation, the principle of equitable subrogation may apply to allow the refinancing lender to be subrogated to the priority of the paid-off mortgage so as to obtain priority over the intervening lien. The Restatement (Third) of Property: Mortgages (1997) embraced the liberal application of equitable subrogation in this context. While many courts have embraced the Restatement approach, not all courts have embraced the Restatement approach (including a recent Delaware Supreme Court decision rejecting the application of equitable subrogation in the refinancing context).
Our speakers will discuss a series of recent decisions (all decided in the 2015 calendar year) addressing the extent to which equitable subrogation is (or should be) available in the mortgage refinancing and land purchase context.
Register for this FREE webinar at https://ambar.org/ProfessorsCorner.
Sponsored by the ABA Real Property, Trust and Estate Law Section, Legal Education and Uniform Laws Group.
Enhancing Mortgage Data and Litigation Risk
Law360 quoted me in CFPB Data Collection Boost May Bring More Lending Cases (behind a paywall). It reads, in part,
The Consumer Financial Protection Bureau has given lenders more time to prepare for its new mortgage data reporting rule and streamlined some of the information lenders will have to provide to regulators, but worries persist that the new data will be used to bring more fair-lending enforcement actions.
The federal consumer finance watchdog on Thursday released a final version of its update to the Home Mortgage Disclosure Act — a key tool that regulators for decades have used to determine which populations were receiving home loans and which were being shut out — that more than doubles the amount of information that lenders will have to provide about the mortgages they issue.
That alone will make for a major technical overhaul of lenders’ operations, an overhaul that is likely to be expensive both in purchasing and developing new technology but also in the number of hours lenders will have to spend to get up to speed. But a second concern revolves around the vast new amount of information that the CFPB will have, and how it could use that information to review lenders’ compliance with fair-lending laws, said Donald C. Lampe, a partner with Morrison & Foerster LLP.
“I don’t think the full cost has yet been established, and I think what you’re seeing here are that there are concerns that this level of granular data can be misinterpreted,” he said. “There’s enough information here from a practical standpoint to re-underwrite the loan.”
* * *
“My position is that collecting more data about the mortgage market is a very good thing for consumers,” said David Reiss, a professor at Brooklyn Law School. “The more data [lenders] provide, the more likely it is that academics or the feds could find patterns of discriminatory lending.”
The added litigation risks do not come solely from the CFPB. The HMDA data is released publicly each year, meaning that activist groups, state regulators and plaintiffs attorneys will be able to comb through the vastly more comprehensive information, said Warren Traiger, counsel at BuckleySandler LLP.
“This is public data, so in addition to bank examiners and the [U.S. Department of Justice utilizing the data, there’s nothing preventing state attorneys general from using it as well,” he said.
And when state regulators, private plaintiffs or other parties come along with new complaints, the expanded data set will allow them to make far more specific discrimination claims than the current HMDA data makes possible.
“There will be a number of additional fields that will be out there that will allow regulators and the public to make more specific allegations regarding discrimination in mortgage lending than the current HMDA data allows,” Traiger said.
Home Loan Toolkit
The Consumer Financial Protection Bureau has issued Your Home Loan Toolkit: A Step-by-Step Guide. The toolkit is designed to help potential homeowners navigate the process of buying a home. As the press release notes,
The toolkit provides a step-by-step guide to help consumers understand the nature and costs of real estate settlement services, define what affordable means to them, and find their best mortgage. The toolkit features interactive worksheets and checklists, conversation starters for discussions between consumers and lenders, and research tips to help consumers seek out and find important information.
* * *
Creditors must provide the toolkit to mortgage applicants as a part of the application process, and other industry participants, including real estate professionals, are encouraged to provide it to potential homebuyers.
The toolkit asks many of the important questions that homebuyers have:
- What does affordability mean for you?
- What kind of credit profile do you have?
- What kind of mortgage is right for you?
- How do points work?
- How do you comparison shop with lenders?
- How does a closing work?
- How do you read your Closing Disclosure?
- How do keep your mortgage in good standing?
That being said, it remains to be seen whether this toolkit will actually help potential homeowners. It is important for the CFPB to design an effectiveness study to see how the toolkit performs in practice.
Court Finds that Defendants Failure to Record all Assignments of the Deed did not Violate ORS 86.735
The court in deciding Romani v. Northwest Trs. Servs., 2013 U.S. Dist. L (D. Or., 2013) granted the motion for summary judgment in favor of Northwest.
The plaintiff’s complaint asserted four claims. Plaintiff alleged that the non-judicial foreclosure of her property was defective. Plaintiff claimed that: 1) that the designation of MERS as beneficiary was invalid, and 2) that the defendants failed to record all assignments of the deed of trust in violation of ORS 86.735.
Plaintiff argued that MERS could not be the beneficiary under ORS 86.705(2) and that, as a result, MERS purported assignment of the deed of trust to Wells Fargo, as well as all other actions taken by MERS should be deemed void.
Plaintiff argued that the foreclosure sale was invalid because the defendants failed to record every transfer of the deed of trust, as required under the OTDA. Specifically, the plaintiff alleged that the transfers of the deed of trust which occurred when the note were transferred by endorsement were not recorded.
Plaintiff sought a declaratory judgment that 1) the defendants had no legal or equitable rights in the note or the deed of trust and 2) that the defendants lack of legal standing to institute, maintain, or enforce a foreclosure on the property entitled her to seek permanent injunctive relief barring the defendants from seeking to foreclose on the property in the future.
After consideration of the plaintiff’s arguments, the court dismissed them as moot and granted summary judgment in favor of the defendant.
