Two Mortgage Experts Debate The "North Minneapolis ARMs Defense Plan"

Photo By John Hoff

When Jeff Skrenes asked me to publicize an  innovative new program to get out ahead of ARM mortgages, click here, I had no idea the plan might be the least little bit controversial. Honestly, when Jeff starts talking about the nitty gritties of mortgages (as he so often does) I pull the same act I once used on my ex-wife when she began going on about her arcane forensic accounting triumphs...I smile faintly, maintain eye contact, nod from time to time, throw out a few phrases like, "Oh, really?"

But it turns out some folks are actually, really, totally INTO this issue, including Alex Stenback of Behind The Mortgage Dot Com...

As a few truly obsessed Johnny Northside readers may know, Johnny Northside was "born" on a particularly hot chat thread of Behind The Mortgage Dot Com, where I first used that name. There it was on BTM that I gained my special superhero blogging powers to fight evil and revitalize my neighborhood, when the chat thread began to radiate a strange, other-worldly energy from the psychic force of the conflict surrounding T.J. Waconia.

So it's always kind of cool to touch base with the blogmeister of BTM, Alex Stenback. Since the subject was mortgage nitty-gritties, I casually sent a link to Alex.

Alex replied with a 7 point discussion.

Holy cow, I thought, Jeff might find this interesting. So I forwarded it, because, well, SOMEBODY should find mortgages interesting, and that person is usually Jeff but, obviously, it's also Alex.

In a short while, Jeff replied with a 7 point reply/rebuttal; sent to me but cc'd to Alex.

How quickly an "ARMs plan" turns into "ARMed conflict."

Some people--and I'm not going to name names, here, but it's not just Alex and Jeff--are incredibly interested in this issue, and tuned in to this debate. So I'm going to print Alex Stenback's 7 points, and Jeff's 7 counter-points. If these two mortgage-obsessed geeks want to continue the discussion, they can use the comment threads.

Get your popcorn. Here's the ARMs PLAN BOXING MATCH between Jeff Skrenes and Alex Stenback.

ALEX STENBACK SAYS: In order for these people "trapped" in ARMs to get any relief, they'll need to have equity in their homes. No equity mostly means no refinance/modification. Only way to determine this will be via appraisal, at a cost. You might find an appraiser who can give you a bulk discount to speed the process of sorting through "help-able" people.

JEFF SKRENES REPLIES: I can't say for sure how foreclosure prevention counselors at agencies such as ACORN Housing and Twin Cities Habitat for Humanity get around the equity issue. However, I am 100 percent positive that they do not obtain appraisals in the vast majority of the loan modifications they get from lenders. Determining equity is helpful, and appraisers may come in handy if we need to start talking about principal reduction to market levels. But mass appraisals are not a necessary component for mass modifications.

ALEX STENBACK SAYS: An assumption that the fact that they have an ARM automatically means that they are A.) in distress, B.) will be facing an upward payment adjustment, is far from a no-brainer. Many AARMs of the vintage you discuss are adjusting down (short term/index rates are very, very low right now) or to something resembling (within 100 to 150 basis points) the going rate for 30 year fixed rate paper. Refinancing costs money--equity, usually--so it often is not the best economic decision for them unless they have equity to burn and are facing a huge payment increase.

JEFF SKRENES REPLIES: We will be pushing for loan modifications in the majority of cases because a refinance includes closing costs and a modification usually has little to no cost. However, the "normal" way to get out of a predatory loan is to use the market (refinance).

If we can find even a few people who use that route it will help bring things back on track. Where I must significantly depart from what you write is regarding rates adjusting downward. All ARM loans have riders that set limits on how high and low the rate can go. In most subprime loans, the minimum rate is equal to the starter, or "teaser" rate.

And I don't call it a "teaser" rate for nothing. Subprime loans are usually indexed to the London Inter Bank Offered Rate (LIBOR) in such a way that no matter what the LIBOR does, the rate will almost always go up. For prime and alt-a loans, this may not be the case, but we will be putting folks in touch with certified non-profit counselors who are trained to examine what is in the best interest of their client.

ALEX STENBACK SAYS: For what it's worth, ARM's adjusting are something like the 8th item on any credible study (one by the Boston Fed comes to mind) of the causes of foreclosure. You might creditably claim that a phalanx of marriage counselors would keep more people in homes.

JEFF SKRENES: (Made no reply)

ALEX STENBACK SAYS: Many of the ARM borrowers you are targeting will not have the credit quality for a refinance or modification (even acceptable credit risk modified loans re-default at a 50 percent clip, by the way)

JEFF SKRENES REPLIES: That number depends on what gets considered as a modification. I've seen "modifications" where someone in a loan with a rate that adjusts every six months gets a one-year freeze on the rate. WELL OF COURSE that is going to result in a re-default.

I don't have re-default rates at my fingertips for our primary counseling services, but it's something I'll look into. As far as where ARM resets rank, I agree that there are other factors that can be more pressing, such as medical issues, job loss, and divorce. But North Minneapolis has historically been redlined and has not received the same kind of credit other communities get.

In the mortgage boom, we were "green lined" and given grossly inappropriate loan products. In 2006, 64 percent of purchase loans and 58 percent of purchase loans to African-Americans were subprime. Almost all subprime loans were ARMs.

Sixty percent of those recipients qualified for a better product at the time of closing. Even with those stats, I was surprised to see how many more North Minneapolis folks cited job loss as the reason for their default.

However, the data clearly shows that our communities deserved better than what they got. We can't track house-by-house whose marriage is at risk, or who is losing their job, but we can do this for ARM resets. And speaking from my own personal experience as a divorcee--

JOHNNY NORTHSIDE INTERJECTS: Oh, good lord, I knew THIS was coming when Jeff just brooded in silence while Alex said something about "a phalanx of marriage counselors."

JEFF SKRENES: --and a recipient of a subprime loan, the bad mortgage can place stress on a marriage, so it's a case of chickens and eggs in my book.

ALEX STENBACK SAYS: A door-knocking campaign like this could very well terrify homeowners--

JOHNNY NORTHSIDE INTERJECTS, LIKE A SMART ALEK: No, it's the people who DON'T knock on your door but come inside your house ANYWAY who terrify us in North Minneapolis.

ALEX STENBACK CONTINUES: My advice would be to focus on informing people what the terms of the ARM are, what the payemtns will adjust to, how, and when. Maybe I mistake the tone, but this whole things looks a little like anybody with an ARM is going to be treated like a gunshot victim in need of an emergency transfusion. I think that would be counterproductive.

JEFF SKRENES REPLIES: I have spent years doing this kind of work and know how to approach at-risk homeowners in such a way that it won't "terrify" them, and I am quite capable of training others to do the same. Our partner agencies have folks doing this who are better than I am at such tactics. To the few who would be "terrified" regardless, if we're bringing the ARM situation to the forefront, it's not counter-productive.

Many ARM recipients were told by their broker that they have a fixed rate, so I am sure we'll come across a fair number of people who honestly had no idea what their mortgage terms were.

ALEX STENBACK SAYS: You should not throw these people back into the ARMs (no pun intended) of lenders that got them into or bought their toxic loans--

JOHNNY NORTHSIDE POINTS OUT: You capitalized "ARMs," Alex. Clearly, the pun WAS intended. Let's try to have a good clean fight, here, and keep those ARMs above the belt.

ALEX STENBACK CONTINUES: Assemble a cadre of good, honest loan officers who are willing to work with the subject borrowers on a one-to-one basis. As satisfying as it may be to try shaming the current lenders publically into "dealing with these loans" the only course of action they will take is whatever is likely to result in the least loss for them, IF there is any loss at all.

JEFF SKRENES REPLIES: The first contacts for the borrowers will be non-profit foreclosure prevention counselors. I spent six years in the mortgage industry, so I know who the good guys and bad guys are, and public shaming is certainly not my first route--

JOHHNY NORTHSIDE SULKS LOUDLY.

JEFF SKRENES CONTINUES: --However, we're beyond the point where we can afford to play nice with those who are responsible for this crisis and I am proud of my track record of successfully using public shaming as a way to bring about benefits for individuals and communities.

JOHNNY NORTHSIDE BRIGHTENS UP CONSIDERABLY.

ALEX STENBACK: I will reiterate that adjusting ARMs are far down the list of foreclosure causes.

JEFF SKRENES: And I will refer you back to my response.

JOHNNY NORTHSIDE: (Doing a bad Howard Cossell imitation) Both of these fighters are exhausted, and just trying to run down the clock while keeping their ARMs in front of their faces, both hoping for a points victory from the judges.

And there's the final bell!

Good job, gentlemen. You really should take your little show on the road.

ADDENDUM: Alex Stenback says, by email, Jeff and him have a lot of common ground. He also points out "your instigator is showing."