- The Washington Times - Wednesday, May 10, 2006

I heard an interesting piece on the radio the other day. It was a short segment that discussed the very real fact that a trillion dollars in mortgage debt tied to adjustable rates is due to be reset between now and the end of the year.

Most folks, especially homeowners and potential buyers, are all too aware that mortgage rates have risen considerably in recent years and are poised to move higher in the near future.

The radio segment focused on the notion that adjustable rate mortgage (ARM) holders are getting burned as a result of rising rates. If the rate hasn’t already adjusted, it will soon, increasing the monthly payment.

One fellow who took advantage of an “option ARM,” which allows the payment to be less than the interest owed, was quoted. Apparently he was making a payment that he thought was enough to cover the interest and pay down some principal. Months later he realized that his payments didn’t even cover the interest because the rate kept rising. Unbeknownst to him, he was getting more in debt.

The segment parroted dozens of other radio pieces, television spots and limitless newspaper articles. Now that short-term rates are considerably higher, it seems that every ARM holder is whining, crying and pleading ignorant about how he didn’t know his rate would rise.

Give me a break.

I’m in no way excusing unethical or illegal activities on the part of some bad apples in the mortgage business. If a borrower was duped into taking out an ARM by unethical tactics used by the loan officer, the fellow needs to be investigated.

But the fact is that mortgage lenders and brokers are regulated by most states and all are required by federal law to disclose the terms of an ARM. In fact, federal law requires that the details of an ARM be disclosed within three days of application.

In Virginia, a mortgage lender or broker must disclose the terms on the federal Truth-in-Lending disclosure, the lock-in form, and the ARM disclosure. These are three separate disclosures that the applicant must sign.

If you take out an ARM, consider it like you would consider investing in the stock market. The rate might not go the way you hoped, not unlike the price of the stock. Why do you think ARMs carry a lower rate? The interest rate risk is absorbed by the borrower instead of the lender.

But predicting the movement of a stock price is a lot harder than predicting the movement of short-term interest rates. I’ll give you a great example.

In the months before the September 11 attacks, the Federal Reserve was lowering rates in small increments to spur an economy that was showing signs of anemia. After September 11, then-Fed Chairman Alan Greenspan made no secret of his intention to continue to lower rates.

Adjustable rates plunged from 2001 through 2003. Some monthly adjustables dropped as low as 3 percent, much to the delight of the folks who took out an ARM a few years before. ARMs were a terrific deal during this period.

By mid-2004 the Fed began nudging rates up. It made no secret of the plan to raise rates at a “measured” pace. ARM holders had plenty of time to get out of the still-rock-bottom ARMs into fixed-rate loans, which were still below 5 percent at the time.

Most ARM holders are now facing fully indexed rates between 6.25 and 7.50 percent, depending on the index and margin.

Fixed rates are hovering between 6.50 and 7 percent with little or no closing costs, depending on the situation. There’s no reason not to grab the insurance policy of a fixed rate.

I have to make one last comment regarding the fellow with the Option ARM who was unknowingly making insufficient payments to cover the interest charged. He receives a monthly statement that outlines the current interest rate, the interest charged for the month, the mortgage balance, and the payment options. My advice? Review your statement.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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