A Call To uh, No ARMS ....Are ARMS really the devil incarnate?

By
Real Estate Agent with Howard Hanna Cleveland City Office

A Call to Arms of the Revolutionary Era KindApproximately 600,000 ARMS are set to well, reset next month. This prompts a coalition of groups to call for a moratorium on ARMS.  A two year moratorium. WKYC's website has an article about it here.

Cleveland's Slavic Village and Union-Miles neighborhoods are in the unfortunate position to be number one in the Country in foreclosures...yes, that is the Country and not the County! So Slavic Village was the setting for this moratorium request. They call it the Save The American Dream program. There were people there from other cities like Des Moines and Pittsburgh.....places also hoping to stem the tide of foreclosures.

They give the example of someone with an $800/month mortgage finding themselves owing $1200/month or $1400/month. I have this nagging question: If you are going to get an ARM mortgage, do you not ask first what the monthly payment might be if the interest rates are 1,2 or 3 % higher than the beginning interest rate? I know I would. Is it that this information doesn't come up? Or that it doesn't make a difference to the purchaser? Do they have salaries documented that will cover the $1400/month down the road?

I would love to have the mortgage Rainers give their professional opinions about a moratorium. I think an open debate could truly help the consumers who read our blogs. I know it might help me make up my mind.

Some of the groups involved in this call to No ARMS: Empowering and Strengthening Ohio's People, The National Training and Information Center in Chicago, and of course, Save The American Dream on their word press blog. Heck, even the Cleveland Catholic Diosese is on board.  What say you, Mortgage Lenders and everyone else?

Does it give people a chance to reform their spending habits: improve credit scores, make payments on time and be able to refi in 12 months? I guess that is my real question.

Peace Out - 3C

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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Carol, these people signed a legal contract and I would have to think that the government can't just come along and do away with it without some compensation involved, which would mean taxpayers would end up paying the bill.

As far as the economy goes, I do not have the exact figures, but I would venture to say that if you would take all the foreclosures as a percentage of all the loans not in foreclosure, that percentage would be extremely small.  The problem is that people are looking at the foreclosures as a percentage of increase over a previous year, and of course that is going to sound like the whole industry is going to pot. I do not know of one Borrower that I did a loan on in lets say the past three years that has gone into foreclosure. I say the past three because those seem to be the years that are taking the most heat for what is going on. Maybe this is because I write loans by the book and do not lie about incomes or bend the rules, but I believe that the majority of the Loan Officers are more like me than the few that lie and take advantage of people.  Yes we should not be so cold hearted as to not be concerned for people who might lose their homes, and we should try to help them within reason, but we should not be made to pay for their mistake. They need to take responsibility for what they did. 

I am dealing with someone right now that is going way over her head to purchase a Condo.  I have told her this and keep on putting the mortgage payments in front of her, but she does not want to hear.  She wants the Condo at any cost.  If she gets the loan, this will probably be my first foreclosure.  But if she comes up with the money to do it, and meets the guidelines, we have to give her the loan or face a law suit for discrimination.  After advising her not to do this, should we also be made to pay later for her lack of common sense?

OK preaching over, I need to know when to shut-up ..... LOL 

Sep 26, 2007 03:32 PM #12
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Jason Sardi
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Honestly & Personally....I'll have to look into the moratorium more to make a valid case on whether I think it will give the public the second chance they often seek and deserve.  Time is the only teller....

Carole - I will look over the moratorium more in depth and give you my opinion, for what it is worth.

Sep 26, 2007 03:36 PM #13
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

George: omg for sure, there are times when all you can do is advise and you can tell someone is not going to take the advice.  I am in no way trying to say that most of the market is going to pot. Besides it's too early to make soup! :-)  Seriously, I am coming to AR mortgage peeps because I feel fortunate to have such knowledge here.  And I truly want to understand if a two yr moratorium will allow for a broad scope appeal (through lenders I assume) to get people who are upside down or getting there, to get their financial homes in order so they can re fi instead of having a 1400 a month mortgage. Cleveland is in a unique position George. Our average income is $26,000. That is low! $1400/month is not matching that. And don't feel like you ever have to shut up on here! lol

Jason I thank you thank you thank you! And it will be worth a lot

 

Sep 26, 2007 03:53 PM #14
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Jeff Dowler, CRS
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Carole:

Like Maureen, my ARM will readjust in March. We knew full well what we were getting into, as I expect many others did. I am not sure a moratorium is the right answer. Will it just delay the inevitable? It seems to me that adjusting the mortgage limits on conforming mortgages is one better solution. There may be others that a mortgage neophyte like me is not creative enough to think of. I am interested to see what others have to say.

Jeff

Sep 26, 2007 04:08 PM #15
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Carole, I was on a role ...... LOL

When the Subprime Companies that we deal with were still coming in to our office, they claimed that 85% of all Borrowers who take out a Subprime Loans stay in a Subprime Loans.  Subprime Loans are usually 2 -3 year ARMS, so that means to me that 85% of the people do not clean up their credit in that time period.  Not because they can't but because they usually continue their bad spending habits.  This moratorium might buy them a little more time but IF these figures and patterns are correct then all that it will accomplish is to forestall the inevitable, in my opinion of course :) 

OK I am done ......LOL 

Sep 26, 2007 04:09 PM #16
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

Jeff, I am a neophyte as well. I sure don't think a moratorium without action by the people in trouble will do any good. But I'm thinking a grassroots effort to get those who are in trouble might help.

I think I should explain; Cleveland - at least some areas of it - were hit hard with seemingly predatory lending issues and supposedly by two large nationwide lenders. One of the lenders targeted (and we have a guy who blogs about these lenders almost every day for months -- the numbers are high) has subsidiary arms (no pun intended) and they (these two) are involved in the bulk of the foreclosures in our area. Supuposedly, there is a high number of people who have paperwork contradicting the new high payments they will find themselves facing in October. I am going by what I have read on local blogs. I can tell you that in February I had over 20 people call me, all within five miles of each other, all but one with the same lender....an 'arm' of one of these two biggies. These are the people I am  hoping can be helped get back on track.  Well, I hope everyone can. I'm thinking Aaron's idea above is a good one.  I'm also reading that some lenders have already voluntarily frozen their rates for ARMS.

I am not saying this is good or bad, but the two companies singled out are being asked to also freeze the rates.....because they are responsible for so many of the foreclosures. So we have voluntary pro bono work to help people being done by mortgage peeps like Aaron, and we have companies already freezing their rates.  I'm always in favor of prevention rather than band aiding afterwards but.....

Sep 26, 2007 04:21 PM #17
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
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George you can roll back in anytime lol.  Your statistics make me worried but do not surprise me, if that makes any sense. I'm referring to :  that means to me that 85% of the people do not clean up their credit in that time period.  Not because they can't but because they usually continue their bad spending habits. 

And if people are going to be given this 'break' and have the rates frozen for two years, it would be delightful if a financial counseling program was mandated. Am I being unreasonable?

 

Sep 26, 2007 04:29 PM #18
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Elaine Reese, REALTOR® in central Ohio
Real Living HER, Powell Ohio - Powell, OH

Well, like many others, I re-fied several years ago. I could have had a 4% ARM. But I'm "old school" and opted for a 5-1/8% for a 30-yr fixed. I'm real glad that given today's market, I don't have to worry about my pmt increasing. AND I didn't take any equity out of my home at that time to buy a new car or furniture, etc. So I've got lots of equity and payments lower than rent. I made my decisions ... and others made their decisions. We all had our choices!

The thing I wonder about the people that "may" get bailed out is will they all of a sudden become responsible at managing their money? Often when people take out equity loans to pay off the credit cards, they don't stop charging. They just take on more debt. Wonder if they'll do the same thing with any "savior" programs. Will these programs end up being a temporary fix if the people don't change their ways?

I DO feel sorry for them, but it was their decision.

Sep 26, 2007 04:36 PM #19
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Elaine Reese, REALTOR® in central Ohio
Real Living HER, Powell Ohio - Powell, OH
Whoops ... it took me so long to write that you already touched on my last point. I agree that some mandatory education should be required.
Sep 26, 2007 04:41 PM #20
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

Hi Elaine! Well if I wasn't so wordy and mouthy I wouldn't be typing while you are LOL.

The problem is that so many people are not fiscally responsible like you are but it made me smile that you are all set with no rate hikes in your future! I think money becomes a 'void filler' like food and other things...and I read more from that .org website (save the american dream) and some of the claims are fairly incendiary. Blaming the entire mortgage industry is first of all not accurate and secondly, not helpful.  I guess Ohioans think alike about the education part :-)

Sep 26, 2007 05:01 PM #21
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Elaine Reese, REALTOR® in central Ohio
Real Living HER, Powell Ohio - Powell, OH
Had to laugh at your "fiscally responsible" comment. Heck, it's highly unlikely I'll be ALIVE in 30 yrs so don't have to worry about paying off the loan. ;-)
Sep 26, 2007 06:02 PM #22
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
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omg it has to be karma Elaine, this time you were typing a response here and i was sending you an email :-)   lol at your comment
Sep 26, 2007 06:06 PM #23
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Leigh Brown
Leigh Brown & Associates, RE/MAX Executive - Charlotte, NC
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Heavens, I take too long to respond and Elaine's already planning her own funeral. =) 

I have empathy for the people who find themselves in this situation, I really do.  But every single client I've ever served who did an ARM was informed by the lender of what the payment would be in year 1, year 2, year 3 and they went in with eyes wide open.  I know that a lot of folks ignored that information but that's their own fault. 

The ones who are begging for a moratorium...are they going to change their personal situations now and over the next two years so they can pick up at that point?  No, they're not.  George is right that statistics show clearly that the folks who have bad credit have bad credit habits and don't get that cleanup accomplished. 

If it's going to happen, then mandatory financial counseling is a great idea-but then, you can lead a horse to water...

My opinion is this-and it sounds mean but so be it-let the chips fall where they may and we can clean up the mess sooner rather than later.  A moratorium simply means that you'll be in worse shape in 2 years than if the bottom falls out right now.

I love posts and threads that make me think!!

Sep 27, 2007 01:51 AM #24
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

LOL Leigh and Elaine will probably out live all of us! You bring up a point that has me concerned too; if there is a moratoriam and we find ourselves in exactly the same situation just two years later.

I really appreciate the dialogue here thanks!

Sep 27, 2007 02:35 AM #25
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Kaye Thomas
Real Estate West - Manhattan Beach, CA
e-PRO, Manhattan Beach CA

Carole- Very thought provoking post..  I know there are people who were sold a bill of goods by some unscrupulous lenders and agents.. but I don't think that's the majority.  I think the problem is that most buyers just don't get what can happen with an ARM.. especially one with neg amortization.  They all think they are smarter then the lenders.. it's like playing the slots in Vegas.. the cards are stacked against you but everyone wants to believe they will beat the house... 

 Smart guys with good financial grounding use ARMS as a tool that they understand and manage.. it's Joe and Jane , who don't understand these loans and should never have gotten them, that wind up losing their homes.  If you are in a job where you income is stable and will not go up by more then a  cost of living increase an ARM will always work against you.

Sep 27, 2007 04:36 AM #26
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Diane Aurit
LKN Realty, LLC - Mooresville, NC
Lake Norman Real Estate
Thanks Carole.  My question is why the lenders don't re-negoiate the new interest rate downward rather than process a foreclosure which they hate to do?
Sep 30, 2007 02:54 AM #27
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO

Hi Kaye: it's so important not to overlook what will be expected of you when the ARM is reset. You are so right, and that shiny low interest rate on the ARM is sometimes way too appealing to a buyer. Thanks!

Diane, that is the 64,000 question. Apparently some of them are doing that but not enough. Since I got into this business the mantra was 'banks don't want to be in the real estate business, they don't want you to foreclose on your home.'  That is not, seemingly, the case anymore. Maybe it's the sheer numbers? Thanks for stopping by.

Sep 30, 2007 03:48 AM #28
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Carole: What a great blog post title and picture! The 'Moratorium' thing is bizarre. I'm not sure it would work and how legal it would be.

Part of me thinks it would save a lot of people - and the mortgage company that doesn't want more REO. The other part of me thinks, Will it make any difference? I've tried to help folks bring up their credit, but it's just too tempting to buy a new truck instead. That's why credit history is still the best predictor of future payments being made or not.

I'm not the person who blames the mortgage industry, either. Yes I'm in it. But yes, I have an ARM, too. I'm a consumer like the rest of 'em.

Great subject.

Oct 02, 2007 06:31 AM #29
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Carole Cohen
Howard Hanna Cleveland City Office - Cleveland, OH
Realtor, ePRO
Interesting you should say that Joey. I met with a client today; she is working on NOT having to go through a short sale; she and i were doing some projects and in the course of conversation I heard about the new car, new cable, new vacation rental in NC. Yeah it made me wanna scratch my head.
Oct 02, 2007 12:20 PM #30
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Jolynne Photography, Creative Wedding Photography, Family Portraits, Bar Mitzvahs
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I could be wrong, but I think the words/comment ratio on this topic is unusually high. Well done inspiring this level of feedback from your folks.

And wait till you see my new boat, and iPhone, and cabinets, and....

Oct 03, 2007 06:35 PM #31
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