Feds looking at one-page mortgage doc
A one-page summary might help clarify mortgage docs for buyers, and it's just what the Feds are looking into.
A one-page top sheet on mortgage documents might be just the fix to prevent homebuyers from getting bamboozled.
“This sheet would say exactly what is going to happen when you take out [a complex mortgage like] an option ARM,” said Deborah Hagan, consumer protection chief for Illinois Attorney General Lisa Madigan. Hagan says the Federal Reserve Board and federal regulators are exploring using the sheet.
An option ARM mortgage is an adjustable rate mortgage that allows a borrower to pay a minimum monthly payment that is only a small portion of the interest owed, and does not pay down any principal. A borrower using this mortgage can pay faithfully month after month and wind up owing more than he or she borrowed.
Madigan’s office has been in the news with its investigation of Countrywide Financial Corp., the biggest U.S. mortgage lender, for possible fraudulent lending practices.
Instrumental in the Countrywide investigation is the Illinois Attorney General’s November lawsuit against mortgage broker One Source Mortgage and its owner Charles Mangold alleging fraudulent and deceptive business practices.
“We looked at a slice of [One Source] loans,” she said. “Half were coming from Countrywide, and almost all of those loans were pay option ARMs.”
She says Madigan’s office is looking at the entire food chain of loans to understand the process and the players all the way from origination to securitization.
“Pay option ARMs will not show problems until 2009 and beyond, because the borrower can keep making the minimum payment,” ” Hagan said.
Hagan said that option ARMs are not included in the freeze announced last week by President Bush and the securities industry.
Limited purpose
“Option arms were meant for a limited purpose,” she said. “They were meant for investors who only want to make a minimum payment. They are not meant for people who are buying their home.”
Countrywide has many funding sources and many functions in the residential real estate market including a bank, a broker-dealer arm, a securities arm, a servicing arm as well as an insurance company.
The company brought in $11.4 billion in revenue last year, and in the past 12 months has financed almost $5 billion in loans, of which 45 percent were adjustable rate mortgages.
In a partnership with The Chicago Reporter newsmagazine, the Illinois Attorney General’s office released new data recently showing Countrywide Financial Corp. was the biggest high-cost mortgage lender in the Chicago area.
An analysis of the data found that Chicago led the nation in high-cost loans for the past three years, with black and Latino borrowers and communities bearing the greatest burdens. Countrywide Financial emerged as the region’s top high-cost lender.
High-cost loans are at the heart of the nation’s unfolding mortgage crisis. They are defined in federal mortgage lending data as first-lien home purchase loans with interest rates at least three percentage points above the U.S. Treasury standard.
The Center for Responsible Lending projects that over 40,000 homes in the Chicago region will be lost due to foreclosure on subprime loans sold in 2005 and 2006.
The Chicago Reporter data showed that high-cost loans are having a disproportionate impact in low-income black and Latino communities in the Chicago metropolitan area. The data looked at offers of high-cost and prime-rate loans made to Asians, blacks, Latinos and whites in the Chicago Metropolitan Statistical Area, including high-cost first-time homebuyer, refinancing, and home-improvement loans.
