Tag Archives: Government

Economist: ARMs Not as Risky as Some Think

Long-term, fixed-rate mortgages are often seen as a “safe” loan product, but one Federal Reserve economist says adjustable-rate mortgages (ARMs) are not as risky as some perceive them to be and did not play a major role in the recent housing crisis. To those who believe payment shocks caused by ARMs were a major player in the foreclosure crisis, Paul Willen, senior economist at the Federal Reserve Bank of Boston, says, “The data refute that theory.” Willen shared his views before the Senate Banking Committee at a hearing titled “Housing Finance Reform: Continuation of the 30-year Fixed-rate Mortgage.”

In a survey of 2.6 million foreclosures, Willen found mortgage payments at the time of foreclosure were the same or lower than the initial payment for 88 percent of the mortgages.

Those with ARMs “were almost as likely to have seen a payment reduction as a payment increase” says Willen because interest rates in any recession – including the recent one – fall rather than rise. Only 12 percent of foreclosed borrowers experienced payment shock, according to Willen. More than half of borrowers whose homes were foreclosed – 60 percent – had fixed-rate mortgages. Willen points to falling prices combined with life events, rather than payment shock, as the major proponent of the foreclosure crisis.

When borrowers have positive equity, it makes more financial sense for them to sell their property than default on their mortgage when they encounter a negative life event such as job loss, divorce, or illness. However, when prices fall and borrowers have negative equity, disruptive life events are much more likely to lead to foreclosure, Willen says in his testimony.

“It does turn out that fixed-rate mortgages default less often than adjustable-rate mortgages, but that fact reflects the selection of borrowers into fixed-rate products, not any characteristics of the mortgages themselves,” Willen says. He suggests that some ARM borrowers enter their mortgages without intending to stay in the homes long-term. When these borrowers’ home values fall, they are more likely to default, according to Willen.

Article is from DSnews.com.

Congressmen Propose Using Retirement Funds to Pay Mortgages

Two Georgia congressmen are proposing a bill they believe will help some homeowners keep up with their mortgage payments and avoid foreclosure. Sen. Johnny Isakson (R-Georgia) and Rep. Tom Graves (R-Georgia) introduced the Hardship Outlays to protect Mortgagee Equity (HOME) Act, which would amend the Internal Revenue Code of 1986 “to provide penalty free distributions from certain retirement plans for mortgage payments with respect to a principal residence and to modify the rules governing hardship distributions,” states the bill.

“Many Americans who have been responsible enough to save for retirement in the past now find themselves out of work,” Graves states. “Unfortunately, under current tax law these men and women cannot withdraw retirement funds to pay for their homes without paying a ten percent penalty to the IRS – often resulting in late payments, oreclosures, and at a minimum punishing a taxpayer who has saved responsibly in the past.”

Under the HOME Act, individuals may withdraw up to $50,000 or half of their 401(k) account – whichever is smaller – for the express purpose of making mortgage payments on their principal residence.

If the funds are used for mortgage payments within 120 days of withdrawal, the individual will not face penalties.
Deferred income tax, however, would not be waived for these withdrawals under the proposed bill.

“This legislation will simply place taxpayers who have saved responsibly on the same level as those who have not, all the while reducing foreclosures, eliminating red tape, and accomplishing a goal that all Members of Congress can support – keeping Americans in their homes,” Graves states.

“I am delighted to join Congressman Graves in introducing the HOME Act today,” Isakson stated. “This bill will help Americans who risk foreclosure use their own resources to make their mortgage payment on time without being penalized by the federal government.”

He continued: “I firmly believe that economic recovery in this country will not occur until the housing market bounces back.”

“To that end, this legislation will help strengthen the American housing market because it will lead to a reduction in foreclosures and in turn will help stabilize home values,” Isakson concluded.

Article is from DSnews.com.