Even A Middle School Student Could Get It

Quote of the week:

"Amid the extraordinary financial events of the last few days, the Fed kept monetary policy on hold. In doing so, the Fed made clear its desire, to the extent possible, to separate its monetary policy decisions from the circumstances surrounding particular financial institutions." -- Peter Kretzmer, economist at Bank of America (my italics). And we also learn today that the Federal Reserve will not reduce the rate.

In times of market volatility it's easy to speculate on impacts, effects, and the future--overall negativity. Unfortunately, the subprime mortgage fallout is having a continuing story in the downfall of certain financial institutions. The story of this down market is not one of major job loss, as it was in the 1990's, where people declared bankruptcy and lost their houses due to lack of income--it's one characterized by the wrong loans for the wrong borrower, often made with lack of disclosure. Bank of America, for example, is still standing because it did not join the subprime bandwagon, although it certainly offered many loans with more flexible guidelines that it doesn't offer now. The worst part of all this, in the end, is that fewer banks will be around for consumer choice--at least that's the way it looks now.

One of the terms buyers need to know is "RESPA", which stands afor Real Estate Settlement Pratices Act. Before you assume this is something totally boring and far too much legalese, just remember that one of the reasons borrowers got into trouble is that they didn't understand their costs statement, didn't really look at their Good Faith Estimate required by the borrower to give to them--if they had, and if they knew just a little bit more about the basis of loan financing, they might not have ended up with what they did.

Unfortunately, these things are not taught in high school, even a middle school student could get it (parents, you must know that sometimes I get phone calls from kids who're reading my blog and have a question), but buyers under the crunch of fast decision making are encountering terms and practices they have infrequent or no experience with.

Reform of the RESPA is underway, with the end goal of making disclosures to buyer easier and more clear. That's still not a guarantee that the end result will be less complicated than what we have now, just different.

In the end, buyers need to familiarize themselves with their proposed loan, and their upcoming home purchase, and take the time to do it.

Guidelines for the Interest Rate Freeze

Today's news and guidelines on loans eligible for the interest rate freeze:

According to the New York Times, the goal of the President's plan is to convert as many subprime ARMs as possible into "more sustainable loans." However, the freeze applies only to borrowers who:

Took out their loan between January 2005 and July 2007 and whose rates are set to increase between January of 2008 and July of 2010; and
Have less than 3% equity in their homes; and
Are current on their payments (or no more than 60 days behind); and
Are able to handle their current lower rate, but will not be to handle a higher payment.
Analysts estimate that the plan will help between 240,000 to 250,000 borrowers.
The freeze is a voluntary agreement on the part of lenders, so no legislation is required for this plan. Analysts note, however, that congressional approval would be necessary in order to increase current FHA loan limits.


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Interest Rate Freeze on Adjustable Rate Mortgages

More to follow, but today's news, and it should be good news for many people, is that rates for loans initiated January 1, 2005 through July 30, 2007 will stay put. If your rates were scheduled for a "reset" between January 1, 2008 and July 31, 2010, the preliminary information, to be announced tomorrow, is that your present rates will not go up per your original schedule on your loan documents, but will remain where they are. If there is also a .5% drop in long term rates on the 11th by the Federal Reserve, this should indeed be good news for borrowers. There are specific terms to this agreement, of course, and two of them are most likely going to be that this agreement between the Bush Administration and the lending industry applies to those who are current on their loan payments and those who have owner-occupied loans. Click here for more information.


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CAR: July's California Median Home Price at $586,030

While the sales volume continues to decline, the median price in this state remains strong. July's median price for single family homes (excluding condominiums) is even a little higher than this time last year, according to the California Association of Realtors.

Partially responsible for this decrease in sales are the tighter lending guidelines--for buyers looking for 100% loans, they are much tougher to find. For all buyers, higher FICO scores are demanded, and some loan programs have disappeared all together. These changes affect the entry level buyers the most, as even a 95% loan-to-value program may be difficult to find.

110 out of 371 communities/cities in this state showed an increase in their median price compared to one year ago. Click on the title link of this article and see the 10 highest priced communities in the state, and the 10 with the greatest increase.

Condos have increased overall to a median price of $434,640, a 2.4% over one year ago.

Real estate is local, so median prices don't reflect changes up or down in other communities on a month-to-month basis.

Important to keep in mind: “It is important to note that decline in sales is not driven by weakening economic conditions ... Rather, the statewide and national economies continue to move forward, with no recession on the horizon at this point in time."

Volatility in the Credit Markets

The world of loans and finance is like a global pile of pick-up-sticks, and this last week demonstrated how one move rolls everything. On August 9th France's largest bank BNP Paribas halted withdrawals on the investment funds it said could not be fairly valued because they held subprime loans. The European Central Bank and Federal Reserve in the U.S. each added money to their own systems in response to the European banks' sudden demand for cash over the subprime loan market problems here.

The analyst at SCME Mortgage Bankers tells us that actually what you don't hear in your television news reports is that subprime loans themselves are not the problem: subprime loan delinquency rates are close to the delinquency rates on FHA/VA loans. When was the last time you heard about HUD-insured FHA loans in the media?--those low down payment loans which have been around since the Depression. Both types of loans lend to borrowers with lower FICO scores and other credit profile issues.

The difference is that the subprime loans are backed by bonds, and some hedge funds have raised capital to buy those bonds, and also borrow additional funds using that same capital, to buy more bonds through leverage. With a decrease in the value of the bonds, such as is now going on the subprime market, these hedge funds are receiving margin calls, meaning the lender wants its money. If the hedge fund cannot meet the demand, it suspends withdrawals. Some mortgage sources have paid out cash to meet the margin calls, and eventually are having to close their doors, American Home Mortgage--a strong and solid lender--being a good example. Banks which lent money to the hedge funds are now in the last few days backed up by deposits from the country's central bank, thus creating news when we read about the European Central Bank loaning $130 billion to its banks, and the Federal Reserve adding $24 billion to the U.S. banking system.

What has happened in the subprime loan market is a much larger story than a short spot on the 6 o'clock news. It's tied into our system of investing, who is regulated and is not regulated, and what happens when market factors change.

For another look at the current situation, click on this Singapore post.


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How to Read Your Mortgage Documents

This is a great article from YOU Magazine specifically relating to adjustable rate mortgage documents. The links show very explanatory illustrations:

Every day you read another horror story about the subprime collapse. Most of the stories focus on the negative impact Adjustable Rate Mortgages (ARMs) will have on subprime borrowers once their interest rates reset. But what's often unreported in these news pieces is the fact that the risk extends far beyond subprime borrowers. That's right. Anyone with any ARM that is scheduled to reset may be faced with an interest rate increase of up to 2.00%-3.00%, even A-paper borrowers.

This article is not designed to scare you or add to the flood of media hype on this topic. To the contrary, our goal with this interactive article is to empower ARMs consumers with the knowledge they need to avoid becoming one of the millions of borrowers expected to foreclose in the coming years. Continue reading and you will learn how to interpret your mortgage documents, calculate your increased rate, estimate your increased monthly payment, and determine what you may need to do to avoid potential problems. We'll also show you actual loan documents and explain some of the confusing legalese that can easily lull borrowers into a false sense of security. Even better, print out this article and discuss and double-check your calculations with your mortgage professional. This will help to put your mind at ease because you'll know exactly where you stand with your mortgage.

These sample ARM documents may differ from those found in your mortgage, but they contain the basic ingredients discussed in this article and are typical of all ARMs documents, with the exception of Option ARMs (which YOU Magazine will feature in a future article).

Initial interest rates on ARMs are generally locked for a predetermined period that can range anywhere from 12 months to 120 months. When the predetermined fixed-rate period of the ARM expires, the interest rate is then subject to change based on a combination of three factors.

The first factor is the initial interest rate cap that was put in place at the time the loan was originated. This interest rate cap typically ranges between 2 to 5 percentage points, depending on the terms of the note. The higher cap of five points is generally in effect for loans in which the initial fixed-rate period is five, seven, or ten years. This means that if your initial interest rate was 6.00%, the maximum interest rate your loan could adjust to upon the first adjustment would be 8.00% or 11.00%. The initial interest rate cap will be in effect for 6 to 12 months before it is subject to adjust or reset. The cap on all subsequent adjustments to the interest rate should be either 1.00% or 2.00%.

For those borrowers with a subprime loan, the pain of the first adjustment will be followed with a potential increase in rates again within six months of the first adjustment.

In addition to the cap, there are two components that determine the interest rate when the ARM adjusts. The first component is what is known as the interest rate index. The index is the fluctuating component of the new interest rate and is based on, or tied to, any one of several indices tracked by the Wall Street Journal, including, but not limited to: the London Interbank Offer Rate (LIBOR), U.S. Treasuries, as well as the Prime Rate.

The second part of this equation is what is known as the margin. The margin is the fixed number that, when added to the index, determines the interest rate the borrower will be charged upon adjustment.

This means that, if the index tied to the mortgage is the Six Month LIBOR, which, let's say is approximately 5.38%, and the margin for a borrower was listed at 5.00, the newly adjusted interest rate could be 10.38%! If the borrower's original interest rate was 6.50%, and the loan carried a 3.00% initial interest rate cap, this loan would adjust from 6.50% to 9.50% at the first adjustment. If the index remained the same at the time of the next adjustment, the interest rate would adjust to 10.38% when the loan resets.

It's important to understand that, while the interest rate will never be higher than the lifetime interest rate cap, this number itself can be relatively high – the life-cap in our sample ARM is 15.95%. For borrowers who are unable to refinance due to changing circumstances, this means that rates could reach the maximum level the loan allows!

Let's apply this to a sample ARM holder and see the results. For someone with a mortgage in the amount of $300,000, the interest costs alone could increase anywhere from $6,000 to $9,000 a year. This translates into a mortgage payment increase of $500 to $750 a month just in interest. For anyone struggling to keep current on their monthly payments, such an increase could have disastrous results.

You may be wondering why anyone would take on an ARM in the first place. Despite the scenarios we've outlined here, ARMs, as a product, are not evil by design. It's true that ARMs are currently experiencing an increase in interest rates. But in a market with falling interest rates, ARMs placed at that time will experience falling rates as well, without having to refinance. Because of this feature, ARMs hold an important place in mortgage financing. In many instances, borrowers have qualified for a larger home or have been offered a lower payment for a similar amount financed because of the availability of ARMs.

Even though underwriting standards continue to tighten as a result of the subprime fallout, it does not mean that you won't qualify for an A-paper loan. Many people who may have been limited to subprime products in the past are now qualifying for Expanded Approval (EA) loans through Fannie Mae. Borrowers qualifying through EA criteria may also have the ability to qualify for Timely Payment Rewards (TPR), a program that allows for automatically reduced interest rates, without refinancing, on a 30-year fixed rate product, provided the borrower makes payments on time for a period of 24 consecutive months within the first several years of the mortgage. In most cases, borrowers with credit issues benefit more from an EA loan than from adjusting with their subprime ARM or originating a new subprime loan. Talk to your mortgage professional today about these options if you have any questions or just want more information.

Obviously, it is very important to understand the complexities of how any of these financial instruments work, as well as any potential implications the borrower might face throughout the life of the loan. Congress, many state legislatures, and the Federal Reserve are currently reviewing how mortgage companies present ARM disclosures to borrowers at the time of application to ensure borrowers better understand the mortgage process. Until then, it's up to you to protect yourself and your family. Don't get caught off guard. Pull out your ARM loan documents and use the interactive features of this article to estimate the changing cost of your ARM. If you don't like what you see, or you're still having trouble working out the numbers, make an appointment with a mortgage specialist right away.

Article also courtesy of Doug Davis at Clarion Mortgage.
Long Beach

Read It All Here: Gary Watts' Mid-Year 2007 Report--Foreclosures, The Media, The Subprime Market and Where It's Going

"I am holding to my original forecast for this year. I knew the 1st and maybe the 2nd quarter would be a rough one. I think the Fed will cut the interest rates later this year, and home prices will begin to firm up and even appreciate in the fall, especially as we head to 2008 and the election year!" Gary Watts.

Mid-Year Real Estate Update By Gary Watts, Orange County Economist, Real Estate Broker:

"I. Three Decades of Real Estate

A. It was 36 years ago, after graduating with a degree in Economics and advanced studies in psychology, that I landed a job (during a recession) as a salesman at a television and appliance store in a new community called El Toro, California. One Saturday morning, a real estate agent “floated” into the store. I asked him why he was so happy. He replied, “Yesterday I closed my biggest deal ever. I sold an oceanfront home in San Clemente for $28,000!

1. Loans were at 7% that year. Today they are 6.33%. I have seen 3 recessions, 3 recoveries and a year when lenders had absolutely no money to lend. I have seen an inflation rate of2l%, home loans at 18% and worked through a 15 year period of double-digit interest rates for home loans. Today, we are within 1% of a 40-year low for home loans.

2. Before beginning my career in real estate, the experts like those in Business Week in 1969 said: “The goal of owning a home seems to be getting beyond the reach of more and more Americans. The typical new house today costs about $28,000.”

3. Six years after getting into the business (1977), National Business magazine said: “The median price of a home today is approaching $50,000 ... housing experts predict price rises in the future won’t be that great”

4. I remember in the early ‘80’s a seller telling me that he had owned a lot of real estate for a long time but the glory days were over and we would never see price increases like in the past. Maybe he was reading Money Magazine in 1985 when they reported: “The golden-age of risk free run-ups in home prices is gone.”

5. My all-time favorite was when the San Francisco Examiner said in 1996: “A home is where the bad investment is.”

B. Since the Early 1990’s

1. The early ‘90’s was the only time in my 36 years that the median home price here in Orange County declined. Over those 6 years, the median home price declined 19.33% or a yearly decline of only 3.22%.

2. However, it only took the following two years to erase almost the entire loss, and before the decade ended, real estate had gone up 37 ~6% -almost twice the decline of the previous 6 years!

3. Since 2000, homes have appreciated over 100%!4. If I add up the appreciation rates for each of the 4 decades here in Orange County, the 37-year average comes to 14.9% yearly!

II. The Media

A. Today’s media plays up bad economic news now more than ever, which leads to misconceptions about economic realty.

B. And since our potential buyers and/or sellers have greater access to this mis­information, it is more important than ever for all of us (as real estate professionals) to be well informed.

C. Historically, housing downturns last only 27 months, and if you begin counting from late 2005, we are in the 20th month. Maybe, just maybe, the end is in site!

1. Since the 2005 downturn, our home prices are still on the positive side.

2. If we take just the past 12 months, our resale homes are down 0.07% from May of last year, while condos are down only 1.6%.3. The condo market has been most affected by the sub-prime issues; these effects are quickly disappearing.

III. The Sub-Prime Market

A. The worst is over, which helps explain why the sub-prime loan problems have almost left the front pages of the media. It might surprise you and your clients to know that only 1/2 of 1% of all loans in the U.S. are sub-prime!

1. These exotic loans became a major influence in the early 2000s. but anyone obtaining them up through 2004 had very few problems due to rapid equity growth. Many with no-money-down purchases soon found they had 20% (+) equity within a year or two!

2. So most of the problems were with the loans that originated in 2005 and2006. During that time, they represented approximately 23% of all loansbeing funded.

3. In Orange County, 2005 was our peak sub-prime funding year. Yet these loans represented only 20.9% of all the mortgages funded that year.

4. Today, sub-prime lenders that need to sell their loans are liquidating their paper for $.96 on the dollar.

5. For some of the banks that provided the sub-prime money:
a. Bear Sterns 1St quarter profit slipped to $361.7 million.
b. Morgan Stanley (holding $5.2 billion in sub-prime loans) had a 60% jump in earnings.
c. Goldman Saks earned $2.33 billion in the past year.

B. The media will still report about massive delinquencies and huge foreclosures in the sub-prime market but those reports will not be accurate.

IV. Delinquencies vs. Notices of Default vs. Foreclosures

A. Delinquencies cover any missed payment — even if it is just one month, it gets reported as a delinquency.

1. The delinquency rate on sub-prime loans is running 13.77%, which is up13.44% from the previous year.
2. The delinquency rate on prime loans is only 2.57%.3. Combining the two rates with the loan volume gives you a delinquency rate in the U.S. for all loans of 4.84%. The record low is 4.0%.4. California’s delinquency rate is 3.25%.

B. Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. These loans begin the foreclosure process. The four states of California, Florida, Nevada and Arizona currently have the largest amount of loans in the foreclosure process. Yet, in their 1st Quarter, 24 states saw a decline in foreclosure starts!

1. Only 3.23% of all sub-prime loans have entered the foreclosure process, with most of the defaults occurring on loans from Jan. 2005 to Feb 2006.
2. Only 1.28% of all 1st Quarter of 2007 saw 46,760 Notices of Default filed by lenders. California has 8.2 million homes and condos with 5.6 million mortgages. Therefore, in the 1st Quarter of this year, only 0.008% of all mortgages entered the foreclosure process for the quarter.
4. The all time record for filings was the 1st Quarter of 1996, with 59,987 notices filed. However, since then, California has built almost 2 million more homes, so the percentage of Notices of Default is still very low!

C. Foreclosures occur when the buyer has been unsuccessful in curing the debt and either a lender or an investor has acquired the property.
1. For sub-prime loans, 68% of the buyers are able to prevent the foreclosure by either refinancing the property or successfully selling their home.
2. For prime loans, the foreclosure rate is 0.86%. Last year, the U.S. saw a combined foreclosure rate of only 1.09%!
3. During 2006, California saw a foreclosure rate of only 1.17%!
4. Last year in Orange County, 5,680 defaults resulted in 697 foreclosures. This means only 12.2% of the defaulting homeowners actually went to foreclosure. We could also say that 87.8% were successful in either selling or refinancing their properties. This rate is below our 17-year average. Of that 12.2% of defaulting homeowners, only 38% of them experienced an actual loss at the sale!

D. A final note about foreclosures: The #1 reason they occurred was due to fraud. The # 2 reason was unethical lending, followed by #3 - loss of job, and finally #4 was medical reasons. By the way, the mortgage insurers are in a good position to cover losses at these (high) levels.

V. The Orange County Real Estate Market

A. There is no doubt that this market has its challenges, but for those of us who have been in the business for many years, this market, although weak, is so much stronger than during previous market downturns.
1. Orange County has the 2nd lowest unemployment rate in the State.
2. Labor analysts forecasted our job growth at l%, but it ended the year at 2% with a total of 29,100 new jobs created.
3. This has helped prices (for the most part) to remain neutral.
4. The wealth of this County is quite incredible and it will continue to keep the local economy growing.
5. Last year, our population increased by 21,200 people.

B. Sales:
1. Home sales are down by 24.8% and condo sales are down by 40.9%.
2. If you remove the flippers and speculators, and have fewer investors and second home purchasers, one can easily see why sales are down.
3. Year to date we are at 13, 336 total sales. If we stay at this pace, we will have sales of 32,006, which is 10% below last year’s sales.
4. Outlook: stronger sales for the later half of the year equaling or surpassing last year’s total sales.

C. Listings:
1. Last year our listing inventory grew, from the beginning of the year to the peak summer months, in excess of 100%!
2. This year, our listing inventory has grown by only 50%!
3. As of two weeks ago, there were only 209 bank owned properties in our MLS, which represents 0.013% of our inventory — not enough to put pressure on the housing market.
4. Although foreclosures may triple this year, this amount will still not be enough to hurt the housing market.

D. Forecast

I am holding to my original forecast for this year. I knew the 1st and maybe the 2nd quarter would be a rough one. I think the Fed will cut the interest rates later this year, and home prices will begin to firm up and even appreciate in the fall, especially as we head to 2008 and the election year!

Please remember that every decade someone thinks the housing market will collapse. Every decade someone wants to tell you that housing appreciation is over, but in my 36 years of meeting people, I never have met a person who regretted buying their first home!"

Long Beach

Clearing Up the Loan Picture

Since I frequently hold open houses I regularly talk to prospective buyers. It's no secret that sales volume has dropped and that predictions abound about the coming drop in prices. I think one of the reasons for buyers holding off is because home shoppers feel like they're shopping in a store when the Big One hits, and suddenly their thrown into another aisle where all around them is shopper's chaos. Recent events in the subprime market have helped the speculation, but may this will add in some perspective about our current economy, which is, after all, still strong:

The Mortgage Bankers Association, in its testimony to Congress last fall, said that homeownership rates are at record levels, nearly 69 percent. It stands to reason that with a higher rate of ownership, there is a higher rate of foreclosure.

Delinquency rates typically peak 3 to 5 years after origination, which is in keeping with record home sales and record loans following 2001. In other words, this was to be expected.

Approximately 1 percent of all loans are in the foreclosure process, well within historical norms, according to the MBA. That’s still less than the post-recession peak of 1.5 percent just four years ago.

Three out of four loans that enter the foreclosure process will not wind up as a foreclosure sale, either because the home owner cures the delinquency, works out a payment plan with the lender, refinances, or sells the home.

Somewhere between 0.5 percent and 1 percent of all homes going into foreclosure are owned by subprime borrowers, according to estimates by Walt Molony, spokesman for the NATIONAL ASSOCIATION OF REALTORS®. On the low end, that's one home in foreclosure out of approximately 200, suggesting that high foreclosure rates are not just a subprime problem but due to a wide range of other causes.

Finally, subprime borrowers are higher risks and have always had a higher delinquency rate than prime borrowers. Yet, only six percent of home owners are nonprime borrowers with adjustable rate loans that are resetting to higher rates.

Long Beach

Subprimes Are One Part of the Total Picture

This topic appears almost daily:

But what’s often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought. New Yorker

While the West Coast is one of the areas seeing a rise in foreclosures, it also has a strong economy with strong employment.

"Foreclosures are increasing inventories in certain local markets. The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures," [National Association of Realtors Economist] Lereah said.

"From a broader perspective, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy," said Lereah in a commentary distributed to NAR members recently.

Long Beach

California and Subprime Loans

If the only thing you've done is turn on the television, you've heard over and over about "subprime" loans. Many people are unfamiliar with a lot of loan terms, and that includes those working in the real estate industry, but just know that because you're shopping for a loan now doesn't mean you're automatically going to get a "subprime" loan, because there are many loan choices. The individuals who've experienced trouble, so often the subject of the news media, are those whose credit scores were lower, so they were offered loans not at the prime market interest rates, but at higher rates with other conditions which led to them not being able to afford their payment when it reached the "fully indexed" level, meaning loan plus margin (the lender's set profit zone). These loans contained terms and condition not understood by the buyers, who for instance thought a 2-month or a 12-month 1% start rate was the actual interest rate, and did not understand what the annual increases would be on their loan, or what that would mean to their payment.

Before you read further, if you're a buyer currently searching for a loan and you have good credit with a strong mid-score over 680 (you knew there are 3 FICO scores, right?), you are not this kind of borrower.

Thus, the following excerpt from California's Department of Real Estate Bulletin, Spring 2007 where a borrower has a 1% start rate, payments increase annually while the deferred interest is added to the loan principal, and after 5 years go to the full payment level, while the loan principal has increased:

We have analyzed the impact on a buyer who takes a $300,000 payment option ARM and makes the minimum payments of $965.00 per month. The analysis is based on an actual adjustable rate note from a national lender. The note provides for first year payments based on a 1% interest rate, annual payment increases of no more than 7 ½% of the previous payment for 5 years after which full payments must be made to amortize the loan over the remaining term. Interest is adjustable monthly beginning after the first month based on the Twelve-Month Average of monthly yields on actively traded United States Treasury Securities adjusted to a constant maturity of one year as published by the Federal Reserve Statistical Release entitled “Selected Interest Rates (h-15)," otherwise known as the MTA. The margin is 3.10. Maximum deferred interest (negative amortization) is 115% of the original principal balance. There is no cap on the monthly rate increases and the life cap is 9.95%. As of the date this article was written, the index value for the Monthly Treasury Average was 4.88 making the fully indexed interest rate 8.0% after rounding. Let’s assume that there are no increases in the index for the first 5 years (a very conservative and unrealistic assumption). The loan term is 360 months.

After year one the balance has increased, because of negative amortization, from the original $300,000 to $312,814; after year 2, $325,787; and after year 3, $338,861. After the 43rd month, the deferred interest maximum is met ($345,328). Since there have been payment increases of 7 ½% each year, the monthly payment of $1,199.00 after year 3, would increase to $2,604.00 per month (the fully amortizing payment over the remaining 317 months) – an increase of $1,405.00 monthly barring any interest rate increases for the life of the loan. Considering that the one-year Treasury Security index value has increased almost 400% since January 2004, even though interest rate increases have slowed recently, the likelihood that this loan would achieve its maximum interest rate of 9.95% is very good. If that were the case after 43 months, the monthly payments would have ballooned to $3,063, a 317% increase from the original payment of $965.00.00 per month. Unless the buyers have planned for the payment increases by either expected increases in income, setting aside all or part of the monthly payment differentials, or some other financial plan to meet the increased debt service, the financial impact could be severe.

Some lenders are now doing the logical thing by making the buyer qualify not just at the initial rate, but the full payment level to avoid this situation, and the Department of Real Estate in the same article now states the real estate agent is to review loan document terms and conditions with the buyer.
NOTE: In a revised statement released on April 12, 2007, the DRE clarified that it "is the fiduciary duty of each licensee who represents the borrower in obtaining a loan to completely explain the terms and discuss the relative merits and risks of these loan products well before the point of signing loan documents." Buyers really must understand the basic terms they are agreeing to.

Long Beach