HUD Blasts ARM Mortgages, Payments Can Triple

by Peter G. Miller
January 11th, 2010
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HUD has published a new Shopping For Your Home guide for consumers and it could not be more blunt when it comes to private-sector adjustable-rate mortgages.

“Two of the most common types of mortgage loans are fixed-rate mortgages and adjustable rate mortgages. The interest rate on a fixed-rate mortgage will remain the same for the entire life of your loan while the interest rate on an adjustable rate mortgage (ARM) may adjust at regular intervals and may be tied to an economic index, such as a rate for Treasury securities. When the interest rate on an ARM adjusts it may cause your payment to increase.”

Notice the expression, ARMs MAY cause your payment to increase? Not WILL cause your payment to rise, or ABSOLUTELY WITHOUT A DOUBT your payment will shoot up, but perhaps, maybe the payment may rise.

HUD then says this:

“Some adjustable rate mortgages allow the borrower to pay either the ‘interest only’ or less than the ‘interest only.’ In both options, none of the mortgage payment is applied towards the loan balance (principal). In a less than “interest only” option, the unpaid interest is added to your loan balance and you can owe more than the amount you initially borrowed. When the loan balance increases to the maximum amount the loan is “recast” and your loan payment may double or even triple. When faced with “payment shock,” you may discover too late that the loan payments no longer fit within your budget and that the loan is difficult to refinance. You may then be in danger of losing your home.

“WARNING: Choosing an ARM product could affect your ability to pay your mortgage in the future resulting in loan default or foreclosure. You need to become familiar with the features of ARM products to find the one that best fits your needs. If you decide to obtain an ARM, consider obtaining additional information. Additional information may be found by contacting the Federal Reserve Board. Contact information is given in the Appendix to this booklet.” (Emphasis theirs)

This is the first I have ever seen a government document which says ARM payments might TRIPLE. Previously, the highest estimate was from John C. Dugan, the Comptroller of the Currency, who said in 2005 that there were conditions under which option ARM payments could double when start periods ended.

Meanwhile, we have plain vanilla FHA loans. There are no conditions under which FHA loan payments can instantly double or triple with adjustable-rate products because negative amortization is not allowed and payment increases are capped. FHA mortgage interest rates are realistic from day one and — more importantly — they are realistic if market conditions change, adjustable rates rise and ARM monthly payments must go up.

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