posted on Oct, 30 2012 @ 01:16 AM
Maybe because the Adjustable Rate Mortgage is a newer spin on the old Variable Interest Rate mortgage without the "nice guy banker" spin that VIR
had. Under the VIR the interest also adjusted but in conjunction with the Prime as set by the Federal Reserve. So, in theory, that rate could go
down....just like the interest rate on credit cards that advertised their rates as Prime +xx% (generally 13%-17%) which was happening in the early to
With both the VIR (and sometimes the credit cards) there was a contractual agreement that the rate could not be increased more than once per year nor
could it decrease two quarters in a row. With such a consumer protection and a hedged bet in favor of the bank (in that the rate could not go down
more than twice in a year) what could possibly go wrong? I mean after all, the Prime Rate only goes up as a response to inflation. And if there is
inflation, you get a raise eventually to compensate right?
The problem was that contractual agreement wasn't worth the paper it was written on and the VIR became a de facto ARM that was evaluated every
quarter if the rate went up and only once per year (if at all) if the rate was going down. In other words, the banks lied after about 5-10 years into
the loan. Which, by the way, is when ARM's seem to trigger into their higher gear. Why did it happen? The original lender sold the mortgage to a
different lender after 5-10 years. The new lender didn't make the original contract so they refuse to honor it. And the homeowner was left without
protection to the new terms with the new lender because they held the title. So the homeowner had to renegotiate the loan because the alternative was
to find a buyer in 30 days losing whatever equity that had accumulated and also finding a new home at the same time so you had something to move into
when/if your house sold. Sound familiar yet?
Now since I mentioned selling as a solution to the problem, I have to mention the other three letter abbreviation of IRS. Yep, the government wants
it's share of the capital gains tax for selling a home if you do not buy a more costly home within a certain timeframe, thus proving a loss in
capital gains. The big difference between the days of the VIR versus the current days of the ARM is....who are you going to sell the house to when
there are a glut of houses on the market, the potential buyer has to consider whether or not they may lose their job for an extended period and the
banks are still not making loans without a considerable downpayment of 20% or more and a spotless credit history?
The odd thing to the whole situation is that the banks are well aware that another foreclosed home in their inventory is a white elephant. The house
will most likely need replaced by the time it is sold and the property as a whole is worth less than what they could have renegotiated the terms of
the original loan amount both currently and in the future as property with a condemned building that the buyer would have to remove is worth less than
no building at all to a buyer. Surely the banks are not expecting another housing bubble within the next five years to make all these foreclosures
worthwhile to them? Could it be that the banks figure that the seized property takes the place of cash assets despite the fact that assets is in fact
devaluing? And the even bigger question, why are the cities not fining the high heavens out of the banks for allowing their property to become rundown
like they would a homeowner for letting the grass become more than 2.75" tall? That is some big money for some municipalities, as much as $100 per
day in some places per residence in violation.