CSBS and AARMR Industry Letter:
Mortgage Payment Increase
The Conference of State Bank Supervisors (CSBS) and the American Association of
Residential Mortgage Regulators (AARMR) are issuing this joint statement to encourage
residential mortgage servicers and providers to contact their customers who have mortgage
loans that are scheduled to recast this year. Consumers with mortgage loans that will
recast this year could have considerable increases in their monthly loan payments, resulting
in payment shock or possible default. This consumer outreach can lessen the shock of the
loan recast, and decrease the possibility of delinquent payments and defaults.
The current challenges facing the residential mortgage industry are cause for serious
concern that many consumers could face problems making their monthly loan payment.
This concern is especially heightened for consumers that currently have a mortgage loan
that is set to adjust resulting a substantial increase in monthly payments in the coming
year. (This payment adjustment is commonly referred to as “recast” or “reset.”)
Nontraditional mortgage loans and loans to subprime borrowers frequently feature a recast
with a significant payment increase.
CSBS and AARMR are concerned that many customers may not fully understand the
characteristics of these products. In addition, many borrowers may have difficulty
affording the higher payments after a recast. With an estimated one million mortgage
loans scheduled to recast this year, it is imperative that servicers and providers reach out to
these consumers to alert them to the potential effects of the recast.
CSBS and AARMR are aware that some mortgage companies that service mortgage loans
have taken steps to contact these customers to remind them that their loan payments are
scheduled to increase and to address any concerns that may arise. If a customer does
express concern about their adjusted monthly payment, these same companies are
encouraged to take steps to address the problem prior to the recast by finding appropriate
solutions, which may include refinancing the consumer into a more appropriate loan.
CSBS and AARMR endorse these types of pre-cast consumer contacts that are designed to
prevent mortgage foreclosure proceedings. Initiating these types of contacts prior to a loan
recasting will not only help consumers but also benefit the mortgage company by limiting
the time and expense involved in collection activities and foreclosure proceedings.
Message to Servicers:
Therefore, CSBS and AARMR encourage mortgage servicers to contact those consumers
whose loans will recast and notify them of this fact well in advance. The servicer should
provide information on when the recast will occur and how much the monthly payment
will adjust. In addition, should the loans go into default, servicers should consider a
workout arrangement to prevent foreclosure. For example, a servicer may consider
modifying loan terms or waiving prepayment penalties.
Message to Providers:
Additionally, residential mortgage providers, including mortgage brokers and mortgage
lenders, should take the opportunity to assist consumers in need. Such assistance not only
helps the individual borrowers, but also serves to rehabilitate the mortgage market at large.
Caution should be exercised by mortgage providers when dealing with consumers that are
currently in a mortgage loan that is about to recast. The bargaining position of the
consumer in this situation may be reduced, especially borrowers that find themselves
unable to service their monthly payments. Extra care must be taken by mortgage providers
to deal with these customers ethically and professionally in order to avoid consumer harm,
including what is known as “flipping,” “packing” fees or putting a consumer into a
mortgage loan that will cause more financial harm to the consumer. CSBS and AARMR
believe that this kind of professional, ethical assistance is also good for business, since a
financially healthy consumer is a future customer.
In addition to issuing this Industry Letter, CSBS and AARMR have issued a Consumer
Alert to mortgage consumers, encouraging them to contact their servicer and a trusted
consumer advocacy group for financial counseling and guidance before their residential
mortgage loans recast.