For Your Meditation (FYM)
Shots in the ARM! Who hARMed the People Should Have Been Shot, knowing full well sooner or later People will not be able to pay! ;+)
The HARMFUL Adjustable Rate Mortgage (ARM): It is like selling arsenic and/or cyanide given to a thirsty blind man as a Coke and saying, after he died, he should have read the label before swallowing it! :+(
“Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls but loses if the interest rate increases. The borrower benefits from reduced margins to the underlying cost of borrowing compared to fixed or capped rate mortgages.”
“Adjustable rate mortgages are sometimes (in fact, very often) sold to consumers who are unlikely to (be able to) repay the loan should interest rates rise.In the United States, extreme cases are characterized by the Consumer Federation of America as predatory loans. Protections against interest rate rises include (a) a possible initial period with a fixed rate (which gives the borrower a chance to increase his/her annual earnings before payments rise); (b) a maximum (cap) that interest rates can rise in any year (if there is a cap, it must be specified in the loan document); and (c) a maximum (cap) that interest rates can rise over the life of the mortgage (this also must be specified in the loan document).”
“In September 1991, the Government Accountability Office (GAO) released a study of Adjustable Rate Mortgages in the United States which found between 20% – 25% of the ARM loans out of the estimated 12 million at the time contained Interest Rate Errors. A former federal mortgage banking auditor estimated these mistakes created at least $10 billion in net overcharges to American homeowners. Such errors occurred when the related mortgage servicer selected the incorrect index date, used an incorrect margin, or ignored interest rate change caps.
In July 1994, Consumer Loan Advocates, a nonprofit mortgage auditing firm announced that as many as 18% of Adjustable Rate Mortgages have errors costing the borrower more than $5,000 in interest overcharges.
In December 1995, a study by the Federal Savings and Loan Insurance Corporation (FSLIC) concluded that 50% – 60% of all Adjustable Rate Mortgages in the United States contain an error regarding the variable interest rate charged to the homeowner. The study estimated the total amount of interest overcharged to borrowers was in excess of $8 billion. Inadequate computer programs, incorrect completion of documents and calculation errors were cited as the major causes of interest rate overcharges. No other government studies have been conducted into ARM interest overcharges.”
“For the borrower, adjustable rate mortgages may be less expensive, but at the price of bearing higher risk. Many ARMs have “teaser periods,” which are relatively short initial fixed-rate periods (typically one month to one year) when the ARM bears an interest rate that is substantially below the “fully indexed” rate. The teaser period may induce some borrowers to view an ARM as more of a bargain than it really represents. A low teaser rate predisposes an ARM to sustain above-average payment increases.”