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Dick and Jane Are Up To Their Elbows In Alligators and The Sharks Are Swimming In The Moat Around Their Home
Spot was the first to notice the heavy stress in the home. Spot was staying away from the tension mongers as to not become a target of their frustration. Spot took a lower profile getting a pat or a hug whenever it looked safe.
Many new buyers have not been exposed to the huge swings of many business cycles of the past and thus were somewhat babes in the woods. Many parents impressed on their children “Not an ARM”… “Not an ARM they will go up and put you in a bad spot” “Get a fixed rate and you won’t have to worry” Those who listened to this cautionary advice and have a fixed rate mortgage are doing ok. Those who choose some of the more aggressive ARMs with high margins are now having a tough time. It starts with a creep up in payments usually centered on a 7.5% increase per year until the negative amortization reaches say a 115% of the original loan amount limitation until the note has to be amortized over the remaining term. Some ARM programs will allow a 125% of the original loan amount. The theory goes that property appreciation will stay ahead of the rate of negative amortization. But what happens when appreciation slows? It is possible the homeowners could be upside down by owing more than the home is worth. Lots of time is required to turn this situation around. The easiest way is to just walk away. The credit is destroyed but what the hey. Years of rebuilding a destroyed credit file will ensue. If borrowers must stay the course and are determined to find a way to make it work there are options available.
If a homeowner reacts quickly and engages the Mortgage Company early on, NOW lenders are proactively taking the lead to restructure borrowers out of the ARMs into fixed rate programs.
This will create payment relief and bring a fixed principal and interest payment, which can be plugged into a family budget with certainty of future housing payments. If it is too late for that option with credit cards at the maximum limits and not one extra dollar is available for anything, then other options must follow. Many of these ARM programs carry a two or three year prepayment penalty. For example, if the loan amount is 0,000 the usual practice is to take 80% of this amount to arrive at a figure of 0,000. If the fully indexed rate is now 7.8% then 0,000 x 7.8% = ,480.00 representing twelve months interest. The penalty is typically six months interest so this amount would be halved to obtain an amount of ,480/2 = ,240 in prepayment penalties if the loan is paid off during the pre-payment penalty period usually the first 2 to 3 years. Most lenders will allow, as it is spelled out in the ARM rider documents, a 20% payment in any one-year without penalty. When a borrower receives a payoff number from a lender’s servicing company that involves a prepayment penalty they will need to pour over the numbers very carefully. A lot of money is at stake. Receiving a true accounting and statement from the servicing company in order to check the math then it needs to be matched against the disclosure and penalty clause language of the loan documents. If a borrower receives a Notice of Default, the noose is then tightening. Payments need to be brought current or foreclosure action follows.
With borrowers facing a desperate situation and they have decided to stay in the property then the old bromides apply. Increase income, reduce spending or do both. If that is not possible and all the blood has been wrung out of the turnip then it is time to see the local Bankruptcy Attorney with respect to looking at a Chapter 13 or Chapter 7 solution. There are limitations with a Chapter 7 with regard to an earnings test. Banks with large credit card portfolios have lobbied successfully to change the law to ease debtors more toward a Wage Earner Repayment Plan represented by Chapter 13. If the income test is not exceeded then a Chapter 7 Bankruptcy would wipe out the unsecured debt such as credit card debt. The mortgage and other secured installment debt such as car loans and such would remain. If the Chapter 13 option is settled on, then negotiations with the credit card companies included in a petition to the court, judge and appointed trustee. Once this process begins, the lender is handcuffed from doing anything to modify the loan. So…a borrower always should try to do this before this option is chosen. The mortgage will always need to be paid or foreclosure will ensue. With say 12 months of on time payment of the Chapter 13 Bankruptcy other mortgage options may be available with trustee approval. In most cases, the mortgage and other secured installment loans may be kept out of the BK petition. Payments will be reduced if a borrower is loaded with heavy credit card debt and some stability can be brought to the family budget.
For the all the “Dick and Jane’s” experiencing a similar circumstance try to renegotiate the ARM mortgage immediately to a fixed rate. If a Bankruptcy action is still necessary, then go to the next step. In all cases, legal advice from a trained attorney must be sought and obtained. This is all predicated on the choice of staying in the home. In time, with focused commitment this will work it’s self out and the corner can be turned. With each day stress will subside and their favorite dog Spot will sense a different household temperament. If a borrower is considering an ARM is this market, check with Spot first. He’ll share his story.
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About the Author: Dale Rogers is a thirty-year mortgage veteran and frequent contributor to the Broken Credit Blog. The BCB is a free website created to assist the general public with information about credit repair and responsible mortgage lending.