Blog sponsored by Bankrupt-Law.com


By Kenneth R. Harney
Special to the Mercury News

WASHINGTON - Call it the reset jitters.

Lenders, mortgage investors and financial regulators across the country are
concerned about the ability of millions of homeowners to handle the
potentially painful payment spikes coming due on loans they took out during
the height of the housing boom.

Though estimates vary, some industry experts say that at least a
half-trillion dollars worth of loans with reduced initial payment terms are
scheduled to reset during the coming year.

Many of these mortgages carry ``negative amortization'' features that permit
borrowers to pile on additional debt beyond their original balance, and make
minimal payments for the first several years. Once the initial period is
over, however, payments could shoot up 100 percent or more as the loan
resets.

Other programs allow interest-only payments with no reduction in the
original loan balance until the reset point. Then payments can jump 50
percent or more in order to amortize the debt balance over a compressed
number of years.

Federal and state financial regulators are expected to issue mildly
restrictive guidelines for lenders making new loans this fall, but tightened
rules won't help homeowners who are heading for payment resets in the coming
year, but may be blissfully unaware of the financial shocks they face.
John G. Walsh, a senior official at the federal Comptroller of the Currency,
recently described his agency's concerns about poorly informed borrowers who
don't realize that their artificially low monthly payments won't continue
indefinitely.

``We've had consumers tell us they didn't know that after making 60 minimum
payments . . . they would owe more than they did when the loan was brand
new. They should certainly understand the basic bargain: The price of a low
payment now is a much higher payment later.

``I think it goes without saying,'' added Walsh, ``that someone, at some
point, should have explained this'' to borrowers with these payment-option
loans.

Lenders active in non-traditional mortgages carrying negative-amortization
and interest-only features say they have taken care to ensure that their
customers comprehend the inner mechanisms of their reduced-payment loans.
They also insist that they've reserved these high-risk programs for
borrowers with solid credit scores, large down payments and excellent
employment histories.

Wall Street analysts have questioned those confident assurances, however.
Standard & Poor's, the mortgage bond-rating agency, warned last year that it
was observing disturbing numbers of minimum-payment loans being extended to
borrowers with sub-par credit profiles. Other Wall Street firms noted that
given the option to make minimum payments, more than seven out of 10
borrowers did so. In the process, those borrowers are racking up heavy
additional debt balances and could be heading for payment shocks -- or worse
-- without always understanding the consequences.

To head off potential problems, the largest mortgage originator in the
United States, Countrywide Home Loans, quietly has begun sending letters to
thousands of borrowers who have been making only the minimum payments on the
company's popular ``PayOption'' adjustable-rate mortgages.

The letters explain that ``this is an early message to alert you that, based
on your current payment trends and potential future interest-rate changes,
the monthly payment you will be required to pay may increase
significantly.''

A model letter provided to me by Countrywide includes this hypothetical
example of what could be ahead for a California homeowner currently making
only minimum payments monthly on a $402,000 loan. The current full interest
rate on the loan is 7.6 percent, but the borrower has been paying just
$1,348.47, far less than what's needed to fully amortize the mortgage over
its 30-year term.

If the loan reset at today's rates, the letter explains, the full payment
required would be $2,887.50 -- more than double what the homeowner has
gotten used to paying. Future reset rates could be even steeper, making the
potential payment crunch much worse.

Countrywide's helpful advice to its customers who want to prepare for their
resets:

. Switch their payment option out of the minimum if they can and move to
either a 15-year or 30-year standard amortization plan.

. Switch to an interest-only option if full payments are not feasible at the
moment. At least interest-only payments will not result in still-higher
principal debt balances to pay off later.

. Explore alternative refinancing options sooner, rather than later.