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October 23 2012

How Big Players Can Protect Public in Coming ARMs Race

Published July 30, 2005

An unprecedented race in ARMs - adjustable rate mortgages - is about to commence, fueled by the Federal Reserve's appropriate decision to raise interest rates.

Our organizations, Operation HOPE Inc. and the Greenlining Institute, have met with all of the primary banking regulators, including Federal Reserve Chairman Alan Greenspan, on this issue and its impact on low- and moderate-income families and those on fixed incomes.

We've also met with 15 financial institutions, four of which recently accompanied us to Washington for meetings on the ARMs race with Mr. Greenspan and HUD Secretary Alphonso Jackson.

There are hundreds of different and often quite complex ARMs. Countrywide Financial Corp., for example, has more than 100 varieties. As Mr. Greenspan told us, it is quite possible that even someone with an advanced degree in calculus would not fully understand the implications of any particular ARM.

We agree. No amount of disclosure is likely to protect low-wealth communities from an ARM disaster, nor is full financial literacy. This time bomb could also damage the financial health of many major banks as well as Freddie Mac and Fannie Mae.

In an ideal world, the vast majority of American families could take advantage of the broadest range of alternatives to the fixed-rate mortgage. However, up to 70% of Americans live from paycheck to paycheck, and a vast majority are financially illiterate. Therefore, an unanticipated increase of just 200 basis points could mean foreclosure and disaster for the vast majority of families that already live on the edge and have little or no discretionary income.

Some financial institutions, and perhaps some regulators, believe that disclosure and financial literacy are sufficient to protect borrowers. Some believe that the free market will resolve all problems. But regulators, financial institutions, GSEs, and community groups have a collective obligation to promote responsible competition along with appropriate safeguards.

One alternative discussed with many of the financial institutions we have worked with is to develop an ARMs "best practices" standard. Since the industry as a while is unlikely to develop high standards, we urge major institutions to do so and institute them as quickly as possible.

These practices might include:

  • Recommending only ARMs that maximize the likelihood of repayment and minimize the likelihood of foreclosure, focusing on keeping people in homes, not just putting them in homes.
  • Creating a toll-free multilingual independent advice hot line that borrowers must use before a loan is completed.
  • Banning certain ARMs products, under guidelines developed by financial institutions, regulators, and community groups.
  • For Fannie Mae and Freddie Mac, developing strict guidelines on what ARMs they will purchase for the secondary market. Compliance with those guidelines should be checked twice a year.
  • For financial institutions, developing special anti-foreclosure principles and offering alternative financing should foreclosure be imminent or the interest rate become clearly too high to be effectively managed.


Homeownership plays a crucial part in America's prosperity. We all recognize that the vast majority of families are far better off building equity in a home than living in a substandard rental apartment with uncertainty about future rent increases.

The best practices listed above could keep us from repeating mistakes that helped fuel predatory-lending scandals. Responsible financial institutions should strongly and swiftly differentiate themselves from those guilty of such abuses.

With reservations, we favor the offering of alternatives to the fixed-rate mortgage. We hope that Mr. Greenspan, who has previously stated his support of ARMs, and the chairmen of Fannie Mae, Freddie Mac, and major financial institutions such as Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., Countrywide, Washington Mutual Inc., Wells Fargo & Co., and Wachovia Corp. will join together to quickly develop "best practices."

However, to be successful, these practices must have the strong support of community leaders who are likewise concerned about the future of the majority of Americans who live from paycheck to paycheck.

Mr. Gnaizda is the policy director and general counsel of the Greenlining Institute, of Berkeley, Calif. Mr. Bryant is the chairman and CEO of Operation Hope Inc., of Los Angeles. View the original print of this article here.