Desperate to get out of a World Savings Pick a Pay

[Nathanal6]

I'm going crazy trying to decide what to do. Originally purchased home back in 2005 for $250,000, put a downpayment for $50,000. Three years later after paying on the minmum payments we now owe 220,000 and the value of our home has fallen to about $125,000. We have been trying to get out of this loan for the past two years, but with no success. Wachovia denied us back in February and we waited 3 months on the Obama Plans only to find out that we don't qualify because our loan is not owned by Freddie Mac or Fannie Mae. We can't refinance because we're up to our eyeballs in debt (car loan, and student loan) and now we are waiting to apply for a loan mod and Wachovia keeps giving us the runaround. They are now telling us that it won't be until the end of June. We are doing well financially and have never been late and our credit is near perfect. I'm afraid these factors are going to disqualify us for a loan modification. We only intended to live in this home for a few years more and I'm afraid that if we manage to keep the home then that will keep us from purchasing a new one. Our loan is not set to recast for another two years and we feel like we're sitting on a ticking time bomb. We're trying to get help NOW while help is being offered but we feel we are being ignored because we are not deliquent on our payments.......help! What other options do we have?

[LHarveyMadman]

I don't understand....are you in hardship? You said that you are "doing well financially". What is your monthly gross (not net) income, and what are your payments on your home - both the minimum neg-am amount, and the fully amortized payment? Do you have any other properties?

Your other debts aren't what's preventing you from refinancing, it's the value of your home. No lender is going to give you a mortgage for $220,000 if your home is worth $100,000 less.

[Nathanal6]

We are not in a financial hardship but when the loan recasts, we will be. Our current gross monthly income is about 6k but this has only been recent since I just returned to work after having 2 kids within the past 3 years. Our minimum payments are $1100 a month with the fully amortized payment being $1700. We haven't started paying the full amount because it is very possible that my husband and I could both be laid off within the next few months due to variety of factors. Before this I did not work, or only worked part time and we struggled to pay the $1100 a month. We have been wanting OUT of this loan for three years and we figure that now is the best time to do it. We viewed this home as our transitional home and we are willing to stick with it and rent it out if we need to but we need to get into a fixed rate loan.

[LHarveyMadman]

You won't be able to use a feared layoff as a hardship. However, you might be able to point to the interest rate adjustment as a possible future hardship. That's basically what I did with B of A when I modified by interest-only ARM. However, my payments before modification, including taxes and insurance, were well over 33% of my gross income. At present, even at the fully amortized amount, your combined PITI might still be in a range that is considered appropriate and affordable.

What are the terms of your ARM? 7/1? What is your current interest rate? When it adjusts, what are the index and the margin?

[Nathanal6]

Our ARM is 5/1 with fully indexed rate of 6.824 % with a lifetime cap of 11.950 , index value of 3.174.

I hope this is what you were asking for, thank you so much for your responses so far!!!!

[LHarveyMadman]

Originally Posted by Nathanal6

Our ARM is 5/1 with fully indexed rate of 6.824 % with a lifetime cap of 11.950 , index value of 3.174.

I hope this is what you were asking for, thank you so much for your responses so far!!!!

That's almost everything . I think you're saying that your current interest rate is 6.824%. The 3.174 is probably the margin. The index refers to a variable market interest rate to which the margin is added, to generate the new interest rate when your loan adjusts.

Okay, I know that probably doesn't make sense....it barely makes sense to me. Let me illustrate using a concrete example.

Your current interest rate (fully amortized) is 6.824%. When the 5 years of fixed rate are over, your rate will adjust to a new interest rate for the next year.

This is how the interest rate is determined: take the "index", which is commonly the 1-year London Interbank Offered Rate (LIBOR), and add the "margin" (which is the 3.174 that you mentioned, I think).

The 1-year LIBOR is an interest rate that is charged between banks for loans to each other. You can find the current rate here:

Money Rates - Markets Data Center - WSJ.com

Search "libor" and you'll find it.

You can also see how the LIBOR changes on a daily basis here:

Mortgage Indexes: WSJ LIBOR: History: 2009


Anyways, if you look at the first link, you'll see that the current rate for the 1-year LIBOR is 1.48625%. Take this, add the margin of 3.174%, and you get an interest rate of 4.66025%, which would commonly be rounded up to the next one-eighth point.

What this means is that if your ARM were to adjust today, your interest rate would go DOWN by over 2%.

However, it's unpredictable how the LIBOR is going to behave over the next two years. As the economy recovers and inflationary pressures start setting in, this rate will definitely - not probably, but definitely - go up. Hence, your projected interest rate will go up as well. If you look at the second link, you'll be able to see just how much the LIBOR has fluctuated over the years.

So how can you use this future uncertainty to your advantage? Obviously, right now it looks like you'd be looking at a decrease in interest payments, but like I said these rates are not going to stay low for more than another year, if even that. You could argue that by the time your loan adjusts, your new interest rate could be a lot higher thus making the loan unaffordable. Also, if you continue to make only the minimum payment (which you probably can't do much longer, based on the terms of many neg-am loans) or interest-only payments until the loan adjusts, then when it does adjust you HAVE to pay principal and interest that is fully amortized over 25 years, not 30. The added expense of the principal payments could make your loan even more affordable.

That's exactly the tactic that I used to get my 5/1 interest-only ARM adjusted with B of A - that will a possible rate increase and principal coming due, I was facing a future hardship (though like I said, my payments were already a hefty chunk of my gross income). I told them that I was just looking to have some long-term security. I really was just looking for a conversion from an I/O loan to a fully-amortized fixed rate loan with a modest cut in rate, though I would have been happy if they had just fixed it at my original rate (6.25%). They actually did better than that.

Sorry this was so wordy. Take a look at your loan docs again to see if you find any mention of what your "index" is.

[Nathanal6]

Thank you so much for your time and response! I took a quick look at my loan docs again and the index value is 3.174 and my margin is 3.650!!!!

[LHarveyMadman]

The index really shouldn't be a fixed number, otherwise it's not a true adjustable rate mortgage. Sorry to belabor the point, but do your docs make any reference anything like LIBOR, or a cost-of-funds index, or constant maturity treasury, or cost-of-savings index, or monthly treasury average, or.....There's several different indices that could be used.

My guess is that there is some sort of variable index at play here, but on your docs they quoted the index value on the day that the docs were drawn up. The lender has to make a projection about future payments in order to be compliant with the Truth in Lending act. However, the estimates given at time of closing are not a guarantee of what the payments might be, since there is no way to predict how rates will move.

[LHarveyMadman]

Oh....Just noticed that what you called your "fully indexed rate" is 3.174 + 3.650 = 6.824%. Is this the number that they used to predict your rate at adjustment? Is this also your current interest rate?

[Nathanal6]

Ok here goes: the index for this loan is the avg of the most recently published monthly yields on 3 month certificates of deposits (secondary markets) for the twelve most recent calendar months as published by the federal reserve board. World Savings calculates the avg by adding the 12 monthly yields together and then rounds the result to the nearest 1,000 th of a percentage point.

[Nathanal6]

I'm so confused. The rate of 6.824% is on the loan docs but most recent statement reflects an interest rate of 6.380..........

[LHarveyMadman]

There we have it. And based on the CODI (certificate of deposit index), I'm going to make a guess: your purchased your home in November 2005, possibly late October 2005.

The CODI for April 2009 is 2.2650. Add your index of 3.650 and you get 5.915%, which is what your new interest would be if your ARM adjusted today.

That 6.380% - I bet that is actually the interest rate that you are currently paying. The 6.824% was based on the CODI + margin from October 2005, and that is what was used to make a guessimate of your future payments when your loan adjusts.

The yields on certificates of deposit - and hence the CODI values - have been lower in the past, back in the early 2000s when the Fed was aggressively cutting rates but the economy was in better shape. The CODI lags behind real-time moves by the Fed and current yields on the 3-month CDs, since it is based on the trailing 12 months. For example, the current yield on the 3-month CD is less than 1%, but the current CODI is 2.265%. If interest rates stay low and the Fed doesn't raise the Federal funds rate, then 3-month CD yields will stay low and the CODI will drop. It could be around 1% in 6 months.

[Nathanal6]

Thank you so much for your assistance!

[LHarveyMadman]

Was I right about when you bought your house?

Happy to help. Good luck!

[Nathanal6]

I actually purchased in November 2005. But you were close. I called and spoke with Wachovia to tell me exactly when the loan would rest, she said it wouldn't reset until 2015, that the interest rate is recalculated annually but it won't actually change until 2015....WTF?????

[LHarveyMadman]

November 2005 was my first guess...

I'm going to venture a guess and say that the confusion probably arises from some provision in your option ARM terms. I can't say much more without resorting to pure speculation. Maybe the amount you are required to pay doesn't change until 2015, but unpaid interest is accruing at a rate than changes every 12 months.

At some point I would expect that you'd hit a wall in terms of how much negative amortization you can accumulate, at which time you'll have to pay at least the full interest each month.