Federal Reserve Issues New CHARM Handbook for Consumers and Lenders

The Federal Reserve Board seldom giveth, but they did send home buyers and owners as well as real estate professionals a bit of a holiday present last week.

The Board in conjunction with the Office of Thrift Supervision issued a revised version of its venerable Consumer Handbook on Adjustable-Rate Mortgages (the CHARM booklet.)

Under the Board's Regulation Z, every lender must provide a copy of the CHARM booklet or a suitable substitute to every borrower who makes application for an adjustable rate mortgage. The booklet which was originally published in 1987 has been periodically updated but with the current concern about borrowers overextending themselves by choosing ARMs during a period of rising rates and putting themselves at even greater risk by picking so called exotic variations on ARMs such as interest only or option ARMs, the revised booklet is timely and one hopes also helpful.

And, indeed, it is discussions of interest only and option payment mortgages that are the focus of the new CHARM booklet which describes how these loan variations work and does so quite effectively.

The booklet features a Mortgage Shopping Worksheet which provides a list of the right questions to ask a lender (What is the initial rate and how long does it apply? Is there a prepayment penalty and how long does it last? And perhaps most importantly - What is the most my monthly payment can be after one, three, and five years?") There are roughly two dozen of these questions and a form to record the answers for a fixed rate mortgage and several ARMs side-by-side. The Board advises borrowers to ask the lender for help in filling the form out. We would suggest that the lender also be asked to sign it once it is completed.

The definitions of ARMs and the various components such as indices, margins, caps, adjustment periods, and so forth are easy to understand and well illustrated with hypothetical cases that are clear and use numbers that are easily converted to real life situations.

Sprinkled throughout the booklet are definitions and tips - hybrid ARMs, no-doc/low-doc loans, mortgage brokers v. lenders, and a considerable portion of the 37 page publication is devoted to consumer cautions - negative amortization, discounted interest rates, payment shock, graduated payment loans. There is also an end-of-book glossary for quick reference.

If you are a consumer the new publication may not be available from your lender until October 1; Regulation Z allows them to use up existing stocks of the older publication until then. However, you can download (and print) a PDF version of the new booklet. Lenders, or other real estate professionals for that matter (not a bad little marketing tool for a real estate agent), can order up to 100 copies of the brochure free of charge from a regular mail address that is available at that web URL.