Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Ed Cage
Anonymous asked:
"When the feds lower the interest rates, if a person is on an ARM, are their rates suppose to drop also?  It would be interesting to see if anyone`s did since the rates have changes so much since last year.  I know our`s didn`t. I don`t understand what the adjustment of the rate depends on. I thought it would adjust according to the fed rate."

 

Dear anonymous:
No when the Feds lower interest rates that means money in general to all NEW borrowers will be easier to get lower rates than they could have before the reduction. Although it will not/does not affect existing contracts, if your note is due for a rate hike in the near future it could result in a slightly less aggressive increase.  

In general the lower rates may make it less likely the dubious mortgage perpetrators will hike your rates as much as they intended to. But even though they could lower your adjustable rate if they wanted to, they are not going to do it. They don’t have to.

A lower interest rate by the Feds generally jump-starts the economy.. Housing starts will be up, more borrowers can qualify, the stock market loves lower interest rates, as do consumers, as well as both big and small businesses. I don’t think it has a substantial affect on food, clothing, or hardware, but it will increase job opportunities.                                           

I am uncertain as to how a reduction in rates by the Feds affects (if at all) a mega driving force in the current economy: ENERGY

                                             
~ ~ ~ ~ ~
One of my strengths is that if I don't know for sure, I'll tell you. I am a numbers person par excellence but I am only 90% sure what I just told you is accurate and there may be some angles I left out.                                             
                                             ~ ~ ~ ~ ~

Do you mind if I anonymously ask this high-quality question for you in the forum?  I'll keep your name off of it. People like Nye, H. Gosh, Dave Mortensen, Jack Wright, Greg Collins (very smart), Joe B, Dee, Mike Dillon, etc and especially William Roper, can give good advice.. So can many others..

Bottom line: A rate reduction by the Feds will not result in a lowering of your current rate but could result in a tiny bit less of an increase in a scheduled adjustable rate mortgage increase in the near future for you. No roll-backs.

Respectfully,
Ed Cage
Plano Texas

972-596-4363

ecagetx@tx.rr.com

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Anonymous asked:
"When the feds lower the interest rates, if a person is on an ARM, are their rates suppose to drop also?  It would be interesting to see if anyone`s did since the rates have changes so much since last year.  I know our`s didn`t. I don`t understand what the adjustment of the rate depends on. I thought it would adjust according to the fed rate."

 
One of the items that ANY ARM borrower OUGHT TO HAVE RECEIVED with the TIL disclosure is a Fed Booklet on ARMs [See for example http://www.federalreserve.gov/pubs/arms/arms_english.htm ].  It tends to explain in very clear and basic terms ALL of the features and aspects of an ARM.
 
It seems uneconomic of MY TIME or that of others at this message board to recount in any great detail information covered in the Fed's publications.  But I WILL give a quick abstracted version and then comment upon a couple of matters NOT appearing in the standard Fed consumer disclosure.
 
Any ARM is going to include these key elemensts:  Starting Interest Rate, Reset Period, Index, Margin, Periodic Caps, Life of Loan Ceiling, Payment Reset Provisions.
 
Starting Interest Rate
The Starting Interest Rate is the INITIAL RATE OF INTEREST to be paid on the loan until its first adjustment.  This MAY BE DISCOUNTED from what is properly described as the "fully margined rate" (explained below), but I have seen instances where the starting rate on a sub-prime mortgage is at a PREMIUM to the fully margined rate.
 
Reset Period
Is the interval or period at which interest rates are to be RESET.  ARM reset periods are often 1 year, 2-year or 5-year, but recent sub-prime loans often have semi-annual reset periods.  Many ARMs now include a longer initial adjustment period.  For example, many sub-prime loans have an interest rate which is fixed for 2 or 3 years and then begins to adjust thereafter. 
 
A key reason for the development of the ARM was to allow financial institutions to better MATCH interest rate risk of assets and liabilities.  The savings & loan crisis two decades ago was do primarily to interest rate mismatch.  Thrift instiitutions had made many thirty year fixed rate loans which were being funded by demand deposits and short term savings deposits.  When interest rates moved up after decontrol, financial institutions found themself funding fixed rate loans with deposits (liabilities) paying HIGHER rates of interest than the the loans they owned (assets).
 
1 Year ARMs can be readily funded with deposits such as 1 year certificates of deposit.  As the deposits funding the loan are repriced, the interest rate on the loan reprices, too.  This helps financial institutions avoid interest rate mismatch.
 
Similarly, 6 month ARMs can be funded by six month CDs.
 
Index
The INDEX used to reprice the interest rate is usually an interest rate index related to the underlying cost of funds used to FUND the loan.  Two decades ago, most ARMs used either a 1-year treasury constant maturity index OR a FHLBB Cost of funds index.  Many Sub-Prime mortgages use a 6-month LIBOR Index. 
 
LIBOR stands for London Interbank Offered rate.  More information about LIBOR can be readily found on the Wikipedia web site at:
 
 
This includes a link to the British Bank Assoication web site that also publishes these rates:
 
 
Those wanting to check on LIBOR rates can check these at the Federal Reserve Board:
 
 
You can also download this data:
 
 
FNMA also posts LIBOR rates on its web site:
 
 
When the LIBOR rate is used, this is a clue that the ultimate mortgage investors FUNDING these loans may be overseas investors investing Eurodollar deposits in Amercian mortgage securities. 
 
The Margin
The Margin is the amount ADDED to the Index to determine the new periodic interest rate.
 
When determining the new interest rate, the margin is ADDED to the Index value for the Index specified in the promissory note and mortgage/deed of trust.  The amount indicated by adding the margin to the Index is called the "fully margined rate".  The actual interest rate to be applied is usually determined by rounding the fully margined rate (very often UP) to the nearest 1/8%, AND THEN APPLYING the PERIODIC CAPS and LIFE OF LOAN CEILING as further explained below.
 
Two decades ago, the standard Margin for a prime first mortgage on an owner occupied property was 2.75%.  Some prime jumbo mortgages had an even more favorable margin of 2.5%.
 
I haven't seen enough sub-prime mortgages to advise you as to what the standard is for sub-prime loans, but I have seen one subprime promissory note carrying a 5.75% margin.  In MY VIEW, this is an OPPRESSIVE interest rate.
 
Periodic Cap
The periodic cap is an amount which any adjustment cannot exceed (up or down).  Two decades ago, prime 1-year ARM mortgages had a 2% annual interest rate cap.  This meant that interest rates could NOT rise or fall more than 2% at any reset period.  A key PURPOSE of the periodic cap was to PROTECT the borrower against the payment shock associated with a much higher interest rate at any adjustment.
 
When the adjustment period is SHORTER -- 6 months rather than 1 year -- the borrower inherently is exposed to MORE FREQUENT payment shocks.
 
I have seen subprime loans where the semi-annual adjustment cap is 1 1/2 percent.  That means that a borrower can face an increase in interest rate of 3% over the course of a 1 year period.  This subjects a borrower to an almost impossible PAYMENT SHOCK.  Moreover, the payment shock doesn't even END there.  The borrower might still face a payment shock of an additional 1 1/2% only six month later.
 
WIth a prime 1-year ARM, the consumer might face a 2% rate increase after one year.  And the consumer might face an additional 2% rate increase after the second year.  With the sub-prime mortgage with 1 1/2% caps at each adjustment period, the sub-prime borrower faces a 3% rate shock in a single year and a 4 1/2% shock after eighteen months.  In MY VIEW, these mortgages are DESIGNED TO FAIL when the marketplace is subjected to ANY serious interest rate stress.
 
Life of Loan Ceiling
In addition to the periodic cap, most prime ARMs also have a life of loan ceiling.  The life of loan ceiling was typically set at 5% or 6% above the initial starting interest rate.  The life of loan ceiling was an interest rate beyond which the interest rate could NOT upwardly adjust.  Since most prime ARMs tended to have an initially DISCOUNTED interest rate (usually about 1% to 1 1/2% discount), the life of loan ceiling actually tended to place the maximum rate at about 4% to 5% above the fully margined rate.  
 
One sub-prime promissory note I was recently shown had a life of loan ceiling set 7% above the starting interest rate.  But the starting interest rate on this mortgage was NOT DISCOUNTED, but rather was at a 1 1/2% PREMIUM ABOVE the fully margined interest rate at the date the loan was made.
 
So INSTEAD of the borrower enjoying an intial interest rate DISCOUNT, the borrower was paying an additional INTEREST RATE PREMIUM of 1 1/2% LOCKED IN FOR TWO YEARS prior to the first adjustment.  The EFFECT of this premium rate was to set a life of loan ceiling of about 8 1/2% above the fully margined rate!
 
The EFFECT of an 8 1/2% life of loan ceiling is to offer the consumer essentially NO UPWARD rate protection AT ALL!  The number of instances when interest rates have rised 8 1/2% and stayed up for ANY extended period of time is very small.
 
The life of loan ceilings associated with a sub-prime loan are another feature making these loans contractual arrangements which were inherently DESIGNED TO FAIL.
 
Frankly, NO BORROWER OUGHT TO EVER AGREE TO TERMS THIS ONEROUS!  Frankly, NO RATING AGENCY ought to have EVER assented to investment grade ratings of even any large portion of the cash flow tranches of securities secured by mortgages with these features!  Any reasonable MODEL of interest rates, home prices, home prices, delinquencies and foreclosures SHOULD HAVE SHOWN: (a) a high probability of large borrower delinquency and default, (b) a very high foreclosure incidence, (c) an exceptionally high loss severity!
 
Payment Adjustment
Most ARMs today involve payments which adjust WITH THE INTEREST RATE.  This was NOT always the case.  And it need not be the case.  In the late 70s and early 80s, the mortgage industry experimented with mortgage loans that featured payment caps and graduated payments, as well as rate caps.  However, these mortgages featured negative amortization.
 
The negative amortization feature of these loans tended to extinguish borrower equity, particularly in periods of stable or falling home prices.
 
The advent of payment capped ARMs and graduated payment ARMs coincided with the greatest interest rate run-up in United States history.  Like today's subprime crisis the payment capped and graduated payment ARMs suffered an unprecedented default rate.
 
Interest Rate FLOORS
One feature of many sub-prime mortgages which has received very little media attention is the introduction of Interest Rate FLOORS.  This is a feature which NEVER appeared in prime ARMs a generation ago.
 
The Interest Rate FLOOR is an amount below which the starting interest rate may NEVER FALL. 
 
One sub-prime mortgage I have been shown combined a starting interest rate at a PREMIUM to the fully indexed rate AND an Interest Rate FLoor set to the initial interest rate.  THis had the effect of LOCKING IN A PREMIUM INTEREST RATE for the life of the loan.  The rate -- already VERY HIGH at loan inception -- could FLOAT UP but could NEVER float down BELOW the starting interest rate.
 
In my view, this is yet ANOTHER oppressive feature!
 
Effect of Interest Rate Caps/Collars, Ceilings and Floors
The net effect of adding ANY periodic interest rate caps, life of loan ceilings and/or floors is to alter the interest rate PRICE SENSITIVITY of an adjustable rate mortgage.  Based upon interest rate volatility in the marketplace two decades ago, most models showed that the price sensitivity of a 1-year 2/6 rated capped treasury indexed ARM was similar to that of a 2-year treasury security.  That is the application of the caps made the value of the ARM fluctuate with interest rates similar to the price fluctuations of a 2-year treasury note.
 
This meant that a prudent thrift institution would tend to fund a 1-year ARM with 2-year certificates of deposit rather than 1 year CDs.
 
Similarly, a rate-capped ARM with month adjustments can be readily funded with 6 month CDs.
 
It would appear to me that the caps/collars associated with the current sub-prime paper are SO LOOSE (and unconstraining) and the life of loan ceiling so far "out of the money" that the caps would seem to have almost NO negative implications on interest rate price sensitivity.  And the existence of the FLOOR would seem to eliminate any DOWNSIDE interest rate risk.
 
So the 6 month LIBOR indexed ARMS with 1 1/2% adjustment caps and a 7% to 8 1/2% life of loan ceiling would appear to me to have a duration -- price sensitivity -- of about 6 months.  It can be readily funded with 6 month deposits or possibly even 3 month deposits rather than 1 year deposits.
 
Final Note on Various Indices
In considering the implications of various alternative Indices, those with adjustable rate mortgages based upon any interest rate index OTHER THAN LIBOR may be in for yet another RUDE awakening.  Even as the Fed drives DOWN interest rates, the sub-prime crisis has already caused a "flight to quality".  That is investors are charging a MUCH HIGHER premium to hold any paper that is NOT government guaranteed.
 
So even as the Fed drives Treasury interest rates LOWER, resulting in LOWER interest rates for treasury indexed ARMs, the flight to quality has a tendency to hold LIBOR and other rates that implicitly reflect some financial institution risk LEVEL.
 
For example, the six month treasury constant maturity index for the week ending Nov 30 is shown to be 3.34% (I am using this to compare with a 6 month LIBOR rate, most with a treasury rate will use the 1-year treasury).  The 6-month Eurodollar deposit rate is shown to be 4.94% for the week ending November 30, 2007, a premium over the Treasury rate of 1.6%.  See http://www.federalreserve.gov/releases/h15/Current/ .
 
Compare the treasury rate and Eurodollar rate from the January 3, 2007 report (week ending December 29, 2006), before the crisis was in full meltdown.  The 6-month constant maturity treasury rate was 5.10%.  The 6-month Eurodollar rate was then 5.36%, a spread of only 0.26%.  See http://www.federalreserve.gov/releases/h15/20070103/ .  Similarly, the spread shown in the Fed's April 2, 2007, report was Eurodollar 5.32% / Treasury 5.08% = 0.24% spread.  See http://www.federalreserve.gov/releases/h15/20070402/ . 
 
As can readily be seen, the flight to quality has driven the 6-month LIBOR to treasury yield spread from 0.26% to 1.6%!  That is an ENORMOUS change in the spread, due to a flight to quality.  The Fed has driven short term treasury interest rates LOWER over the past year year.  6 month rates are even LOWER than 3 month rates reflecting market ANTICIPATION of further rate reductions.
 
So DESPITE a reduction in the 6 month treasury yield by 1 3/4%, sub-prime borrowers are looking at only 1/4% of interest rate relief!  You may expect that we will hear from numerous OTHER "Anonymous" posters curious WHY their rates are NOT going down!  They will NOT GO DOWN as the crisis deepens due to the flight to quality.  And in some instances they CAN NEVER GO DOWN due to the inclusion of oppressive RATE FLOORS! 
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Moose

Ed Cage wrote:
Anonymous asked:
"When the feds lower the interest rates, if a person is on an ARM, are their rates suppose to drop also?  It would be interesting to see if anyone`s did since the rates have changes so much since last year.  I know our`s didn`t. I don`t understand what the adjustment of the rate depends on. I thought it would adjust according to the fed rate."


Most ARMs issued by lenders (especially in the subprime world) are designed to be ratchet adjustments, i.e., they really won't go down. But at least most have a fixed cap.

They are normally tied to LIBOR - the London InterBank Offered Rate which is a daily published rate followed by banks in the UK, US and Switzerland. The trick is to find how it is used - on a specifc date, or an average over weeks or months. Then the rate will be some number of points above LIBOR.

Moose
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Ed Cage
Thanks Moose.

And to William A. Roper: Another superb, helpful, in depth post!! 
A+++

MR ;^D
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