Wednesday, September 20, 2006

FRB: Testimony, Braunstein--Non-traditional mortgage products--September 20, 2006

Sandra Braunstein is the Fed's Director of Consumer and Community Affairs. She spoke before a Senate Subcommittee today. The comments largely focued on the truth in lending law, but also discussed various "non traditional morgtage instruments and the Fed's efforts to assure that borrowers know what they are getting into.

FRB: Testimony, Braunstein--Non-traditional mortgage products--September 20, 2006:
"Nontraditional mortgage products have increased the range of financing options available to consumers and have grown in popularity over the past few years. With traditional thirty-year fixed-rate loans, consumers have equal monthly payments that are sufficient to cover the accrued interest and pay down the principal. In contrast, interest-only loans allow consumers to defer the payment of principal and make only interest payments for an initial period. Option-ARMs allow consumers to make 'minimum payments' of less than the accrued interest, which causes the loan balance to increase ('negative amortization').

Some consumers may benefit from these products and the more flexible payment options, for example, consumers with seasonal or irregular income. For consumers who expect their incomes to increase, the initially lower monthly payment with these loans may enable them to purchase homes that they otherwise might not be able to afford. But these loan products are not appropriate for everyone, depending on their individual circumstances. When monthly payments increase, sometimes substantially, consumers may face 'payment shock.' Thus, it is important for consumers to have the information necessary to understand the features and risks associated with these types of mortgages...."
Later:
"The Federal Reserve plays several roles and engages in various activities to ensure that consumers understand credit terms and the options available to them when they are shopping for mortgage credit."
She concludes:

"The Federal Reserve is actively engaged in efforts to ensure that consumers understand the terms and features of nontraditional mortgage products. Improving federally required disclosures under TILA is one aspect of this endeavor. We are also pursuing other opportunities, such as consumer education publications and interagency regulatory guidance that will include recommended best practices for depository institutions. We expect the Board will continue these efforts over time as mortgage products evolve in response to consumers' changing needs."


Teaching note: this would be a great fit for an institutions, money and banking, or commerical banking class. Or even a real estate class.

2 comments:

george said...

When considering a mortgage refinance, there are several important factors to
consider before deciding on a particular type of refinance loan or a specific
mortgage company. One of the questions it is important to ask yourself is, “What
is the main reason I am deciding to refinance my home?” Are you refinancing to:
Lower your interest rate
Many companies specialize in exactly this type of refinance loan. Finding a
company that will work with you specifically on lowering your interest rate is
not difficult by doing some research on the internet. Try typing in key search
phrases specifically related to “lowering my interest rate” in major search
engines.
Cash out the equity you already have in your home
You can use the equity in your home to get cash. Find out exactly how much money
you can borrow by searching for a equity calculators online.
Consolidate Your Debt
If you have a lot of unsecured, high interest debt (credit cards), it might
benefit you to refinance your mortgage and use the cash to pay off your higher
interest debt. You might be able to refinance and get more cash up front than
what you owe on other debts, allowing you to lower your total monthly expenses
and put a lump sum of cash in your account at the same time.
There are many reasons you may need to refinance your mortgage, and
identifying what your specific needs are is very important before moving forward
in the process.

Mark L. said...

this worked out well