Federal Reserve Issues New CHARM Handbook for Consumers and Lenders
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The Federal Reserve Board seldom giveth, but they did send home buyers and
owners as well as real estate professionals a bit of a holiday present last
week.
The Board in conjunction with the Office of Thrift Supervision issued a revised
version of its venerable Consumer Handbook on Adjustable-Rate Mortgages
(the CHARM booklet.)
Under the Board's Regulation Z, every lender must provide a copy of the CHARM
booklet or a suitable substitute to every borrower who makes application for
an adjustable rate mortgage. The booklet which was originally published in 1987
has been periodically updated but with the current concern about borrowers overextending
themselves by choosing ARMs during a period of rising rates and putting themselves
at even greater risk by picking so called exotic variations on ARMs such as
interest only or option
ARMs, the revised booklet is timely and one hopes also helpful.
And, indeed, it is discussions of interest only and option payment mortgages
that are the focus of the new CHARM booklet which describes
how these loan variations work and does so quite effectively.
The booklet features a Mortgage Shopping Worksheet which provides a list of
the right questions to ask a lender (What is the initial rate
and how long does it apply? Is there a prepayment penalty and how long does
it last? And perhaps most importantly - What is the most my monthly payment
can be after one, three, and five years?") There are roughly two dozen of these
questions and a form to record the answers for a fixed rate mortgage and several
ARMs side-by-side. The Board advises borrowers to ask the lender for help in
filling the form out. We would suggest that the lender also be asked to sign
it once it is completed.
The definitions of ARMs and the various components such as
indices, margins, caps, adjustment periods, and so forth are easy to understand
and well illustrated with hypothetical cases that are clear and use numbers
that are easily converted to real life situations.
Sprinkled throughout the booklet are definitions and tips - hybrid ARMs, no-doc/low-doc
loans, mortgage brokers v. lenders, and a considerable portion of the 37
page publication is devoted to consumer cautions - negative
amortization, discounted interest rates, payment
shock, graduated payment loans. There is also an end-of-book glossary for
quick reference.
If you are a consumer the new publication may not be available from your lender
until October 1; Regulation Z allows them to use up existing stocks of the older
publication until then. However, you can download
(and print) a PDF version of the new booklet. Lenders, or other real estate
professionals for that matter (not a bad little marketing tool for a real estate
agent), can order up to 100 copies of the brochure free of charge from a regular
mail address that is available at that web URL.
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