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Borrower's Choice: Pay Now, Pay (More) Later

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Ever gotten an offer in the mail to skip a payment on your mortgage or home equity loan? It happens all the time.

The basic pitch is that you can skip a payment now, and the lender will just extend your loan by a month on the back end, so you will pay it later.

Jim Cosman is a vice president with Sovereign Bank in Boston, which makes this offer to people with home equity loans.

"It's a payment holiday," says Cosman. Sovereign permits borrowers to have one payment holiday in the summer and one in the winter, around Christmas.

So what's the catch?

"One of the ways we do make some money is they pay a little more interest," Cosman says.

If your monthly payment amount is $500, by skipping the payment until later you are, in essence, borrowing an additional $500 at the interest rate on your loan.

Now, if you are doing that just once with a home equity loan that is around 6 percent and using the extra money to pay off a credit card bill with 20 percent interest, that might be a good idea.

But consumer advocates say you have to resist the temptation to do it more than once.

Kathleen Keest, with the Center for Responsible Lending, says the problem is that people get used to skipping payments twice a year. That causes them to pile up thousands of dollars in deferred payments and extra interest.

There are also fees associated with taking a payment holiday. Sovereign charges a $35 fee for every skipped payment, and some banks charge twice that much.

So, Keest says to do the math. If you do, skipping a payment might not sound like such a good deal.

SEC Inquiry Focuses on Banks' Vulnerability

The Securities and Exchange Commission has begun an inquiry to determine how vulnerable major Wall Street banks are to defaults on home loans, a person familiar with the accounting inquiry said.

News of the inquiry was reported Friday by The Wall Street Journal, which said Goldman Sachs Group Inc. and Merrill Lynch & Co. are among the first companies to be examined.

The examination is described as "Street-wide" and a routine part of the SEC's oversight authority, according to the person, who declined to be identified by name because the inquiry has not been publicly disclosed.

On Thursday, French bank BNP Paribas suspended three securities funds valued at $2.75 billion, saying it could not value them accurately because of problems in the U.S. mortgage market.

SEC Chairman Christopher Cox disclosed in late June that the SEC had started about a dozen investigations related to complex aggregations of mortgage debt known as collateralized debt obligations, which investors around the world purchased in recent years.

John Nester, an SEC spokesman, declined to confirm or deny the SEC's activity, other than to say that placing a value on mortgage securities "is always a concern."

The investments trade infrequently and are difficult to price and difficult for many investors to understand, experts say, leading to uncertainty that has sent financial markets into tumult this week.

"Valuations are something that our inspection teams are absolutely focusing on when they do inspections," Nester said.

SEC officials also have been examining the collapse of two Bear Stearns Cos. hedge funds that folded after making bad bets on the market for borrowers with weak, or subprime, credit.

The stock market has dived this week amid signs that credit is drying up in the mortgage and corporate buyout markets after several years in which lending standards were loosened - too far, in retrospect, many experts say. Stock markets plunged worldwide Friday with turmoil from the U.S. mortgage crisis rippling across the globe.

From Associated Press reports



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