A Homeowner's Know-how on the Latest in Mortgage Loans
MICHEL MARTIN, Host:
I'm Michel Martin, and this is Tell Me More from NPR News. Coming up, Cheap, Chic in New York. A fashionista tells us where hot styles can be found for little or nothing. But first, more on the mortgage loan crisis.
Adjustable-rate mortgage loans are scheduled to reset this summer and fall. But meanwhile, the Federal Reserve has cut the discount rate three percentage points since last September, and may lower it to two percent this week. The discount rate is the rate that banks use to borrow from the Federal Reserve. So what does this mean for the mortgage crisis, and most especially for you, the homeowner? Here to help us with this is, is our money coach Alvin Hall. Welcome Alvin, welcome back.
ALVIN HALL: Glad to be back from London.
MARTIN: First Alvin, why are adjustable-rate mortgages resetting again?
HALL: Mortgage rates, credit-card rates, and other adjustable loan rates reset when the Fed sets the discount rate. This is the baseline rate from which all other interest rates are calculated, Michel. So as soon as the Fed changes that, all of these other rates, whether it's credit cards, mortgages or other, even car loans if they are adjustable, will also change.
MARTIN: So is this good news for homeowners or bad news?
HALL: It's scary news for homeowners.
(SOUNDBITE OF LAUGHTER)
HALL: If the Fed lowers the rate, then it might be good news, because then that means their rates will go down. But chances are the Fed may raise it. We don't know. That's the gamble, and if they raise it now, and they raise it again later in the year, it means that everybody's mortgage payments will go up. For those people who are right at the brink, another increase could definitely set them on the road to default.
MARTIN: Because the rate might exceed their ability to pay? Their new payment might exceed their ability to pay?
HALL: When interest rates go up on your mortgages, your payments will go up, and if you don't have that extra 50, 75 or a hundred dollars to meet that mortgage payment, you then start to scramble. And it's nerve wracking for people. But if the Fed lowers it on the other hand, then their payments will go down and that could be some relief to them.
MARTIN: How soon after the Fed sets the discount rate does the mortgage reset? Does it happen quarterly or semi-annually or?
HALL: It depends upon your particular mortgage. Generally it happens right after they set the rate, within a couple of weeks or days. But, that also depends upon the type of mortgage you have. Not all of them can go up an unlimited amount. Typically there is a cap on the amount that they can raise it in response to the Federal Reserve raise.
MARTIN: Do you have any idea how many people are carrying, or what percentage of people who are carrying mortgage loans, are carrying adjustable-rate mortgages right now?
HALL: That's a good question, and I actually don't know that. But a huge of recent loans are adjustable-rate mortgages because of those teaser rates. A lot of the sub-prime mortgage ones were adjustable rate, because you come in, make a very low down payment, you'd have a low rate for a while and then at the reset time, it would go up to this market rate, or slightly above market rate. So a lot of the newer mortgages have that kind of rate.
MARTIN: So, we're bracing now for another wave of people who might be at risk of losing their homes, if the rates go up again.
HALL: Every newscast, whether it's Charlie Gibson, Brian Williams or Katie Couric, that will be the lead story when these rates are reset. Because it will have a huge knock-on effect for all those people who are on the border line, who are just getting by, if the Fed raises that rate they're going to be in trouble.
MARTIN: Congress is debating a housing bill right now. Is this aimed at this situation, or is it a broader relief?
HALL: I think it is aimed at the specific problem going on, but trying to effect a broader relief. The bill is called the FHA Housing Stabilization and Home Owner Retention Act, and what it does is to take people who are in trouble, and then it will buy those mortgages from the lenders at below market value, at what they call - I think it's called the short payment. So, if I'm a bank, and I've made you a loan, Michel, then the FHA will come in, and buy that loan out for below the principal amount that I owe.
MARTIN: So, but, but would this all...
HALL: Or actually, that you owe...
MARTIN: OK, that you owe. Would this bill help people in this situation, who find themselves with a mortgage who's cost has escalated beyond their ability to pay?
HALL: What's interesting about this bill is that it does hold out the hope that Congress is really beginning to see the depth of the problem. And it's not just the people who took out the mortgages who are at fault. It's also the institutions who made the mortgages to these people. If this is somebody's primary residence, and this is the first time they've gone on the property ladder, this bill may help them keep that first step toward building personal wealth for themselves, and that's what I think is really important here.
MARTIN: Well, but of course there is another point of view on this, as there has been all along, there are those who say that the people who took out these loans bear responsibility for understanding the terms. And if they bought something that they couldn't afford, then they have to experience the consequences of that. I mean, what do you say to that?
HALL: Perhaps I'm an optimist, but I think that most people who take out mortgage loans, don't always understand the full details of their mortgage loans. But something anybody sits down and reads those papers. I think the majority of people who got caught in this trap were probably hardworking people who really wanted to get on the property ladder, and thought that all of a sudden they had discovered an easy way to do it. I don't think they thought through the consequences of taking out an adjustable-rate loan with the teaser mortgage, and I don't think anybody on the lending side sat down with them and said, if interest rates go up, here is what your payments will be. So I think like all situations, it's like a marriage in a way - both sides are at fault.
MARTIN: What should a homeowner do if he or she is anticipating a reset and is already at capacity? Like, if you say to yourself you know what, I'm already maxed out. I'm already paying as much as I can afford to pay on my mortgage. You know, you're one of the folks who always recommends being proactive. Is there something a homeowner can do in that situation other than just, you know, bite their fingernails waiting to see what the Fed is going to do?
HALL: You could call up the lender if you know who the lender is, and say look at what's going on in the economy. People are getting laid off, I can't get an extra job to make the mortgage payment - please work with me. I think in the current environment, lenders might be a little more receptive to working with you so that you don't default on the loan, knowing that this bill could potentially pass Congress. Barney Frank had said something which I think is really important, that if the services don't work with people, then legislation will be passed to, you know, make things much more restrictive to them.
MARTIN: And Barney Frank is.
HALL: Being the head of the Financial Services Committee in Congress.
MARTIN: On the House side?
HALL: On the House side, yes.
MARTIN: Do you have any evidence though, that actually proactively contacting your mortgage lender or your servicer is actually yielding any positive results, or is that just a Hail Mary play?
(SOUNDBITE OF LAUGHTER)
HALL: It may be just a Hail Mary play for many people who are really in deep trouble. But you see in stories I read in the New York Times, the LA Times, as well as the Washington Post, that every once in a while a servicer tries to work with the people in order to help them hold onto the house when they're in a tight situation. But I think those stories are actually few and far between, and one of the things that's consistent among those stories is that the people who are seeking the help are pretty persistent.
MARTIN: And finally, obviously the thing that one would want to do in a situation like this if this kind of uncertainty is so unsettling, you'd want to convert to a fixed-rate loan. Is that possible or is the - is the sort of the credit crunch so widespread nowadays that that's really very hard to do?
HALL: The credit crunch is so widespread that the requirements for getting a fixed rate mortgage are onerous. For any mortgage it's onerous, but for a fixed rate I think it's really difficult. Now they want you to have a perfect credit rating . They want you to have so much money in the bank relative to that. The idea that you can get these huge loans now, or refinance at no cost - banks are grabbing all the fees that they can, and demanding that your credit worthiness be of such a high status that most people can't qualify.
MARTIN: Our personal finance expert, Alvin Hall, joined us from our New York bureau. Alvin, thank you.
HALL: You're welcome.
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