Monday, July 14, 2014 - Article by: Justin Fitzhugh - Nations Lending Corporation -
Last Month, Freddie Mac reminded us it will no longer purchase mortgages with a lookback period of less than 45 days starting October 20th, 2014. A month earlier, the FHA issued a proposed rule to require all FHA guaranteed mortgages to the same lookback and notification periods. Will consumers handle higher monthly payments better because they receive a notification 60 days before the due date? Like everything else, I think, some will and some wont.
Freddie Mac changed purchase eligibility in response to the Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z), specifically, 1026.20(c), Rate Adjustment Disclosures. The servicing of ARMs requires the servicer to a minimum of 45-days lookback and 60 - 120 days notification periods whenever there is an increase on the monthly payment and/or interest rate. To date, there are many exceptions, but the rule will become effective industry-wide on January 2015.
The rule affect interest rate terms stated in a loan contract; therefore, changes in rates or payments resulting from loan modifications are not subject to the rule. In other words, the minimum 60-days notification requirements wont impede the execution of loan modification. However, interest rate changes that occur after the settlement of a modification are subject to the rule, and borrower must receive a change in terms notice at least 60 days before these are effective.
The purpose of the rule is to help borrowers understand the cost and terms of ARMs, and regulators believe consumers will be able to make better decisions if they have an extended period of time in which they can refinance the loan, put more money together, prepare their budget, etc. After the rule was finalized, and after considering feedback from market participants, the CFPB concluded the benefits of implementing this rule outweigh the costs to servicers and lenders.
I think the extended period will benefit consumer to a certain extent. Yes, some borrowers may be able to refinance or prepare their budgets but still they will face many limitations which cant be overcome with a 60 days notice. When the reset of an interest rate is about to happen, unless it is a promotional, the interest rate provided by the refinancing wont be too far from the upcoming rate. Add to this the cost of the refinancing, and perhaps this may be a bad idea after all. For borrowers who have a job with a set salary, unless they have been preparing their budget for a while, or are about to get a raise, what who can dramatically increase his/her income in a month?
Yes, I give credit to the Federal agencies who have taken action to empower borrowers, but like the various commenters who expressed similar concerns before the rule was final, the costs imposed lenders and servicers is much greater than the benefits consumers will get. It is true that we have had to revise proprietary product offerings, and that ARMs product which contributed to the subprime mortgage crisis have been taken out of the market.
Oh well, the rule is. I hope borrowers appreciate the changes and take advantage of these. Even if they cannot get a higher paying job in a couple of months, or refinance in such a way that the costs outweigh the trigger of higher monthly payments, here is a symbol that Government and mortgage industry participants care.
Aside from this announcement, Freddie Macs Bulletin 2014-12 includes information about certain updates to MERS, selling requirements, and recent fraud training and reporting requirements. You can access the bulleting here: http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1412.pdf
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