Adjustable-rate mortgages could have ripple effect

By TIM GRANT
Pittsburgh Post-Gazette

Adjustable-rate mortgages might have seemed like a great idea at one time for people buying or refinancing homes, but those loans very likely will end up costing consumers far more than higher home payments.

A new credit-scoring system that rates borrowers based on the type of mortgage they have could cause
people with adjustable mortgages to pay higher interest rates on everything from credit cards to car loans. This month, credit reporting agency Equifax Inc. unveiled its new ARM Predictor, which will let members of the banking and financial services industry know the likelihood that someone seeking credit might have a mortgage with an adjustable rather than fixed rate.

Consumer advocates fear the new rating system will spook lenders and hurt borrowers. “There are a lot of people who qualified for a better mortgage, but were steered into an adjustable rate mortgage because it was more profitable for the broker,” said Ed Mierzwinski, an advocate with U.S. Public Interest Research Group in Washington, D.C. ”My concern is it will be used in a draconian manner,” he added. “It’s not going to help consumers who have adjustable mortgages.”

While TransUnion does not have a scoring system that identifies borrowers who might have adjustable rate mortgages, the company is diligently working on one, said Clifton O’Neal, a spokesman. “The makeup of lenders’ portfolios have changed and they need more information to manage portfolios effectively,” O’Neal said. “They’ve requested this service and the (credit reporting) industry is responding.”

Representatives at Experian, the third major credit reporting agency, could not be reached for comment. With about 2 million homeowners holding about $600 billion worth of adjustable rate mortgages that are expected to reset at higher amounts over the next 18 months, lenders are bracing for more waves of home
foreclosures when many owners won’t be able to make their payments.

Many people used ARMs as a means of buying homes they really could not afford, hoping to refinance on better terms if housing values continued to rise. Monthly payments on adjustable mortgages are initially lower than fixed-rate mortgages, but payments go up over time based on what index the mortgage is tied to.

Credit industry representatives point out that people’s credit scores will not be affected by their adjustable rate mortgages as long as they are able to make the payments. Credit reports make no distinction between types of mortgages. The ARM Predictor will be a separate report that issues a score of 1 to 5 for each
borrower. A score of 1 would mean the borrower will not experience an ARM reset.

A 5 score signifies an 80 percent chance of an ARM reset. “This is a way for the consumer to be protected from having too much credit at a time they could be most vulnerable,” said David Rubinger, a spokesman for Equifax. “For the lender, it’s a way to help minimize risk.” Some financial experts, however, say this
system bears a close resemblance to so-called universal default, which allows a credit card company to raise a customer’s interest rate if he makes a late payment with another creditor.

“This is pretty much going to be all that credit card companies, student loan companies, auto lenders and other banks need to charge customers higher rates solely based on the kind of mortgages they have,” said Lynnette Khalfani, a former reporter for the Wall Street Journal and CNBC, and author of “Zero Debt.”

“Folks who were teased and seduced to sign up for ARMs just two years ago are paying for that decision in ways they never imagined,” Khalfani said. “You could never fathom it would cause higher rates on credit cards and higher payments too. That smacks of unfairness to the consumer.” Lauren Saunders, managing attorney for the National Consumer Law Center in Washington, D.C., said even though there’s considerable turmoil in the economy, it doesn’t mean everyone with an adjustable rate mortgage can’t afford it.

“The credit reporting industry has a lot of finely tuned tools to judge a person’s credit risk,” she said “This seems like a crude one that penalizes people for signing up for a product that was being sold to them as
beneficial.”