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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2006

Weighing All Options

To best serve borrowers from all backgrounds, brokers should consider all factors before presenting ARM and interest-only loans

r_2006-05_Adams_spotRegulators, the media and even members of the mortgage industry warn about the risks associated with nontraditional mortgages, particularly interest-only and adjustable-rate mortgages. We will hear more by 2007, when the Mortgage Bankers Association has estimated that $1 trillion worth of adjustable-rate and hybrid mortgages will reset to current interest rates.

Thousands of homeowners might find themselves in situations they cannot afford. Many also will be hit with a dramatic spike in monthly mortgage payments, and the most unfortunate could be pushed into foreclosure.

Borrowers certainly should do their homework to familiarize themselves with all available mortgage products before they sign a contract. But the truth is that most homebuyers rely on their mortgage broker to recommend an appropriate loan product. And at times, brokers might not consider the bigger picture.

In the North Carolina Fair Housing Center’s September 2004 mortgage-industry study “Cash in Your Face,” some tested lenders were found to have treated black and Hispanic-American borrowers differently than whites. These borrowers often were directed to nontraditional mortgages and not clearly informed of these mortgages’ risks. Studies from Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development have drawn similar conclusions.

Mortgage professionals should focus on practices that benefit their industry and their clients. A renewed government focus on regulating the industry and the prospect of mass foreclosures should reinvigorate their approach.

What has happened

When interest rates were at rock-bottom a few years ago and housing costs were skyrocketing, many lenders developed creative mortgage products to help more people buy homes. These mortgages have allowed people to afford more with lower monthly payments and with little or no money down. They made the dream of homeownership a reality for millions.

If interest rates shoot up, though, these mortgages can quickly become a nightmare for financially unprepared borrowers. In the past two years, the United States already has seen some increases in defaulted mortgages and foreclosures.

Further, as Federal Reserve Board Gov. Mark Olson said in June 2005: “Data show record-high homeownership rates among low-income and minority borrowers, yet the reports of lending abuses and increased foreclosure rates loom as dark clouds on an otherwise bright horizon.”

Growing concern centers on cases of disparate treatment between minority and white borrowers. This has resulted in greater risk of foreclosure or financial difficulty for minority borrowers. Although loan officers or brokers may not intend to discriminate, their discretion in what rates and products they offer ultimately influences their borrowers’ purchases.

In “Cash in Your Face,” the North Carolina Fair Housing Center examined if racially motivated preferential treatment was prevalent among prime lenders. The study chose 24 national and regional lenders and solicited product information from them using “tester” borrowers seeking homes in the $350,000 to $400,000 range. Control borrowers were white, while variable borrowers were black or of Hispanic origin.

Eighteen percent of control testers were found to have received more-favorable terms than variable, minority borrowers, according to the study. Of those preferential-treatment situations, 60 percent featured second mortgages on piggyback loans that had a larger interest rate for minorities than for whites with a comparable economic status. In these cases, interest-only loans and other ARMs were perceived as the more “affordable” choice.

Overall, according to the study, minority testers were offered more interest-only loans than white testers were.

In many situations, homeowners who receive ARMs or interest-only loans would be better off with a fixed-rate mortgage. For the many borrowers who are unable to put 20 percent down, brokers should not shy from offering mortgage insurance as a way to get a 30-year fixed-rate loan — rather than advocating an adjustable piggyback or a combination of short-term loans. With mortgage insurance cancelable after homeowners attain 20-percent equity in their home, the additional cost — usually between $85 and $100 a month — drops. Payments decrease and stay there.

What should be done

With the growing number of foreclosures in some markets, regulators have taken a renewed interest in the oversight of mortgage-lending practices.

The U.S. Department of the Treasury’s Office of the Comptroller of the Currency and other federal agencies proposed new guidelines for mortgage lenders when offering alternative mortgage products. In turn, there must be more emphasis on finding appropriate alternatives and solutions for homeowners and future homebuyers.

Homebuyers and homeowners depend on mortgage professionals to provide them with the information they need to make their financial decisions, much like they depend on medical professionals to give them medical advice. Mortgage professionals should make proper diagnoses of buyers’ financial health and recommend appropriate mortgage products, while explaining the risks and benefits. If borrowers are looking for lower monthly payments, a range of appropriate low-down-payment and low-monthly payment options should be presented.

To quote the training manual for northern Illinois’ HOPE Fair Housing Center: “Housing discrimination and segregation diminishes everyone. They strike at the heart of the American Dream — the right to live in the home of one’s choice.”

Lenders and brokers, along with regulators and community advocates, are keepers of that dream. Together, we can help people buy a home they can afford without an added mutual risk of foreclosure.


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