07/15/2007

News / Florida has new law to protect from risks of adjustable rate mortgages

The red-hot real estate boom a few years ago that lured many into the mortgage industry attracted lenders who were unscrupulous and those who failed to warn their clients against potentially volatile loans.

A new law aims to provide extra protection to those with non-traditional mortgages by holding brokers more accountable. The law requires lenders to explain all fees up front and sets up safeguards like requiring proof of income.

Specifically, mortgage brokers and lenders offering adjustable rate mortgages would have to provide borrowers with a copy of the Consumer Handbook on Adjustable-Rate Mortgages, which explains the potential risks.

The law also authorizes the state to take action against the principal of any lending institution based on actions of its employees.

Reaction from local lenders is mixed on the new law with some wondering it it will achieve its intended goal.

"This bill could do a lot to insure loans are done correctly. I think it's an important bill but like any other bill, I think it's more important to see what kind of teeth it has behind it," said Mike Koebel, senior account executive at CNL Bank in Bradenton. "You had people jumping into the mortgage industry thinking it was an easy way to make bunches of money," Koebel said.

Florida is one of the leading states in foreclosures and mortgage fraud, Koebel said.

Now, the country is in the midst of what experts call the subprime mortgage meltdown. A subprime loan is given to people with less than excellent credit at a higher than normal interest rate. Not only is it affecting homeowners who took out unconventional loans, it also forced a number of lenders out of the business.

The latest is General Electric Co., which is the largest company to quit the mortgage business. GE, an industrial, finance and media conglomerate, said the sale of its $3.7 billion subprime mortgage portfolio will avoid a worsening business environment in the industry. GE lost $160 million on the sale.

Another large lender New Century Mortgage filed for Chapter 11 bankruptcy protection in April.

Ninety five other U.S. lenders have closed their doors since late 2006, according to lenderimplode.com. Some of those were among the biggest culprits when it came to writing subprime or riskier loans and cutting major corners, said Matt McKillen of Preferred Mortgage.

Some wrote loans using only stated income for clients instead of proof of actual income, he said. Failure to document the borrower's income allowed them to pad the numbers and qualify for more loan money. Under the new legislation, stated income only will be accepted on the applications of those who are self-employed.

"Many of the established companies, if they aren't closing up, they are scaling back," Koebel said. "There is some bloodletting still to happen in our industry."

Fewer loans are now being written as a result of lenders tightening their purse strings and fewer home sales.

Experts agree that an ethical mortgage broker should take the time to explain to clients exactly what they are signing and what it means to their pocketbook. Oftentimes, that wasn't happening.

"Unfortunately, there are some brokers that didn't explain to their buyers what would happen when the rate adjusted," said broker Michelle Daniels of International Lending Group in Palmetto.

The purpose of an adjustable rate mortgage, according to Daniels, was to give people an opportunity to build their credit and later refinance when the rate adjusted. Many, who bought during the boom, however, owe more on their home than the home's current value, making refinancing nearly impossible.

Daniels said she is not sure how adding another paper to the stack is going to ensure that buyers understand the risk.

"Having something for them to sign that they are not going to read or understand, I'm not sure how that helps," Daniels said. "The weight is on the brokers to explain."

Experts agree that while there has been a surge in foreclosures, there is a lot more to come. "The market was on fire all the way until the end of 2005 so we haven't seen the worst of it," McKillen said.

Most adjustable rate mortgages have a lower interest rate for the first two to three years. The most risky of these are the option ARMS.

Those who took out option ARMs and were strictly paying the minimum payments not understanding the ramifications were some of the first people who lost their homes to foreclosures, Koebel said.

An option ARM allows the borrower to select from one of three payment plans every month. A borrower can choose to pay principal and interest, just interest, or a small portion of the interest.

Many lenders are taking short sales - when the lender agrees to allow the borrower to sell the home at a loss - as more and more homes purchased both traditionally and with ARMs are nearing foreclosures. Falling home prices have hurt many people because the home no longer holds the same value it did at time of purchase.

Being proactive may help those in trouble find a temporary solution that will at least allow them to hold onto their home. "Now everyone is left holding the bag," Daniels said. "The worst thing anybody can do is not call their lender."

Those who lose their homes to foreclosure may have to wait years before they can attempt to qualify for a new mortgage.

"It's not the end of the world for somebody but it will be a tough time for them for at least a few years," Koebel said.

By MELISSA FOLLOWELL
mfollowell@bradenton.com
Sourcr: http://www.bradenton.com/business/story/97894.html

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