This story about Anita Bretten in GA, who can’t refinance out of her adjusting ARM, has been in many newspapers over the weekend.
While the story carries some human drama, it lacks financial insight.
The reporter should have made this an educational story by asking a few questions
Why can’t Anita refinance? Is the equity not there? Is here income too low to qualify at current rates? Is there a penalty? She’s had the loan for 3 years, so there shouldn’t be a penalty, but if there is, just pay the penalty, even if it’s 3 months interest.
Did the loan officer lie about the possibility of refinancing? If so, I think the loan officer should be sued. I think all loan officers which misrepresented these exotic mortgages should be sued in class-action lawsuits.
Each time I obtained a mortgage, the lender sent me packets of HUD Disclosures. I read them all. Didn’t Anita read her disclosure packet?
Why is anybody surprised by thier ARMs resetting? They are supposed to reset. That’s what the “A” is for in ARM. What is the disclosure policy from the lender?
“I’ve gotten rid of all my credit cards and I’m not supposed to refinance for another year,” she said. “All I can do is tread water right now.”
It sounds to me like she over extended herself with credit card debt which, 1. makes her debt ratio too high to qualify and 2. also negatively impacts her credit score.
Considering how much her payment went up, I’m guessing she was on a teaser rate on her ARM (maybe 1-3%). Perhaps her ARM reset to 5 or 6%? If so, what rate is she going to get when she refinances? Probably the same…
Call me Kooky…
I knew lots of people used the ARM’s to get into houses they couldn’t afford, but I had no idea that someone would be crazy enough to change a fix-rate mortgage to cash out and then screw themselves with a ARM, WTF?????
Are you serious, people really did this?
People not able to refinance is certainly a huge factor that I hadn’t thought of. I always thought every reckless borrower will get bailed out by the (still) low long-term yields. We will see what will be the predominant reasons for the no-refinance situations. Sure, missing equity comes to mind, this either through falling appraisals or if the ARM was with negative amortization. Maybe credit standards are already tightening, too. Do I understand this correctly: Suppose the Fed raises the short-term rates again for a few times. Even if the yield-curve inverts and offers attractive long-term yields, some people might be stuck with whatever contract they signed initially, which could even mean paying higher rates than the 10-year. They are screwed!
I had a client that lost their job last year and fell prey to an unscrupulous lender. They refi’d out of a fixed into a cash out option ARM. They recently sold and got hit with a $10K prepayment penalty. Unfortunately they never called me to ask my opinion which would have been to get a HELOC to buy themselves time not to put $10K into some scumbag lenders pockets.
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