Adjustable Mortgage Loan (AML)
In 198 1 the Federal Home Loan Bank Board issued regulations incorporating both variable and renegotiable rate mortgages into adjustable mortgage loan regulations. “An adjustable mortgage loan (AML) permits adjustment of the interest rate, which may be implemented through changes in the payment amount, the outstanding principal loan balance, the loan term, or any combination of these variables.” (FHLBB Res. No. 8-12069 1981 .) As with VRMs and RRMS, interest rates must be decreased as the index decreases, and of course may be increased as the index rises. The lender may increase the loan term up to 40 years to cover interest rate increases (although such an extension is not an option that must be offered to borrowers).
The interest rate may be tied to any index beyond the control of the lender and may be adjusted as often as monthly. Examples of indexes to which an AML may be tied are (1) the FI-LB District cost of funds to FSLIC-insured savings and loans; (2) the national average contract mortgage rate for the purchase of existing home; (3) the monthly average of weekly auction rates on three-month or six-month U.S. Treasury bills, and (4) the monthly average yield on U.S. Treasury securities adjusted to constant maturities of one, two, three or five years. All of these indexes are published in the Federal Reserve Bulletin.
Notice of interest rate changes must be given to borrowers at least 30 days, but no more than 45 days, prior to the change. Lenders may not charge a prepayment penalty or fee associated with interest rate changes. Within these regulations and guidelines, lenders may establish their own AML plans. However, administrative costs, competition and secondary market requirements limit
flexibility for most lenders’ in this regard.
Frequent adjustments are costly. Competitors may limit the frequency and magnitude of adjustments. And secondary market lenders have established certain limitations for the AMLs they will purchase. For example, the Federal Housing Loan Mortgage Corporation will not purchase AMLs that allow rising balances or that have a subsidized payment (“buy down”) in the early months.
Categories: Admin Notes Tags: Adjustable Mortgage Loan (AML)
Graduated Payment Mortgage
In a graduated payment mortgage (GPM),th e payments begin at a lower level than in a comparable standard fixed payment mortgage. They gradually rise to an amount greater than the payment in the standard fixed payment mortgage. After the period for payment increases ends, the payments for the remaining term are fixed.
In the early years of a GPM loan, interest accrues at a higher rate than is actually paid. The unpaid interest is added to the principal balance. This is called negative amortization because the remaining balance is increasing rather than decreasing.
There are several plans for FHA-insured GPMs under Section 245 of the National Housing Act. The approved plans are:
Plan 1 : Payments rise 2.5% annually for five years.
Plan 2 : Payments rise 5% annually for five years.
Plan 3 : Payments rise 7.5% annually for five years.
Plan 4 : Payments rise 2% annually for 10 years.
Plan 5 : Payments rise 3% annually for 10 years.
Categories: Admin Notes Tags: Graduated Payment Mortgage
Shared Appreciation Mortgage
A shared appreciation mortgage (SAM) allows a lender to charge a below-market periodic interest rate by sharing in the property’s sale proceeds at time of sale or upon maturity of the loan. The payment to the lender upon maturity or sale is termed contingent deferred interest. The percentage share of the property’s appreciation the lender will receive is established in the loan agreement.
While there have been numerous advocates of SAM home loans, no large-scale program has been implemented. One cause of this is home appreciation is geographically correlated with income and ethnichacial characteristics; therefore, the loan could be inherently discriminatory. A second cause is typical terms do not return a competitive yield to lenders. In income property lending, however, the SAM idea is used as one form of a “participation” mortgage loan.
Categories: Admin Notes Tags: Shared Appreciation Mortgage
