Senate Bill S3956

                                 BILL NUMBER:  S3956

 TITLE OF BILL :

An act to amend the banking law and the real property law, in relation
to alternative mortgage instruments and graduated payment mortgages


 PURPOSE :

The purpose of this bill is to protect homeowners and banks from
possible delinquency and foreclosure problems by providing stricter
requirements for lending institutions which make adjustable rate
mortgages, like those required by the Federal National Mortgage
Association.

 SUMMARY OF PROVISIONS :

This bill would amend subdivision 1 of section 6-f of the Banking Law
to require lending institutions making adjustable rate mortgages to
limit initial interest rate discounts and interest rate increases and
limit negative amortization.

This bill would further amend subdivision 5 of section 279 of the Real
Property Law to prohibit the making of graduated payment adjustable
rate mortgages to home consumers.
              

Section One Legislative intent

Section Two

Amends subdivision one of section six-f of the banking law to permit
the making of residential mortgage loans and cooperative apartment
unit loans which provide for periodic readjustment of the rate of
interest charged for the loan as successive terms of the loan; terms
of loan which are shorter than the term of the mortgage; repayment of
the principal amount of the loan by regular payments which are not
equal in amount throughout the term of the mortgage; or any
combination of the above subject to the provisions of subdivision two
of section six-f, provided that such loans limit initial interest rate
discounts to not more than two and one-half percent below the market
index, limit interest rate increases to not more than three percent
above the market index, include lifetime and annual caps on interest
rate increases, and limit negative amortization to one hundred ten
percent of the amount of the loan.

Section Three

Amends subdivision five of section two hundred seventy-nine of the
real property law to prohibit the making of graduated payment
adjustable rate mortgages for one to six family residences.

 JUSTIFICATION :

Despite increased interest rates, adjustable rate mortgages (ARMS),
which put the risk of the interest rate rising on the consumer,
account for slightly less than half of all mortgages issued in the
United States and New York. There are problems associated with ARMs,
however, which result in a significant number of delinquencies and
foreclosures. The purpose of this bill is to protect homeowners and
banks from those problems by providing stricter requirements for
lending institutions which make ARMs, like those required by the
Federal National Mortgage Association (Fannie Mae). The proposed
legislation addresses the three major problems associated with ARMs
which lead to delinquency and foreclosures: teaser rates, negative
amortization, and payment shock.
Teaser rate mortgages are ARMs with extremely discounted interest
rates for the first period of the mortgage and are used to entice
consumers to take out adjustable rate mortgages. After the first
payment period, the interest rate is adjusted to a level equivalent to
or higher than the rate for current fixed rate mortgages. Such rapid
increases in monthly payment of the loan causes payment problems for
the borrower and often result in taking a second loan or in defaulting
on the ARM. This bill would limit initial interest rate discounts
lending institutions can offer to two and one-half percent below the
market rate.

Negative amortization occurs when payments on the mortgage are not
enough to cover the interest due and the interest shortage is added to
the principal. Often the result is that the amount of the loan
increases rather than decreases after the monthly payment and
homeowners are forced to pay interest on unpaid interest. This leads
to both default and the inability of many people to payoff their
mortgages when they sell their houses. This legislation would change
the cap on negative amortization from the current 125 percent to 110
percent of the original amount mortgaged.

An increase in monthly payments to a mortgager already struggling to
make monthly payments can result in "payment shock", where the
borrower simply cannot afford the added interest.  Payment shock is
the most obvious in teaser ARMs, where the lower initial interest rate
allows more consumers to qualify for the loans.  When the interest
rate on the loan rises, many households cannot afford the added cost.
Although payment shock occurs in non-teaser ARMs as well, for those
who were barely able to qualify at the initial rate, the rise in
monthly payments can result in either default or negative
amortization. This legislation would limit interest rate increases to
not more than three percent above market rate and further require
lending institutions to provide lifetime and annual interest rate caps
on all ARMs.

The graduated payment ARM (GPARM) is an alternate type of ARM which
also creates delinquency and foreclosure problems. The GPARM begins at
a low level of interest and increases in fixed percentages at specific
times throughout the life of the mortgage. Although payments on GFARMs
rise on a predetermined schedule, GPARMs erode a homeowner's equity by
deferring interest owed to later dates. Like the Fannie Mae
regulations, this legislation would prohibit the making of GPARMs to
home consumers. This legislation, designed to protect the homeowner,
would not extend to the making of GPARMs to commercial consumers.

ARMs are available alternative for many consumers who might otherwise
be unable to afford to purchase their own home. The consumer takes on
the risk of rising interest rates in anticipation that the interest
rate will remain stable or go down. When the interest rate rises,
however, many homeowners are faced with delinquency or foreclosure.
This legislation would serve to minimize the problems inherent in ARMs
and thereby preserve their value to both homeowners and consumers.

 FISCAL IMPLICATIONS :

None.

 EFFECTIVE DATE :
This act shall take effect on the thirtieth day after it shall have
become a law and shall apply with respect to any residential mortgage
loan or cooperative apartment unit loans commitment for which is
extended or made on or after such date.