Financial Update (Third Quarter 2007)

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subprime mortgage graphicFurthering efforts to educate consumers on the potential risks of certain types of mortgage products, the Federal Reserve Board and other federal financial regulatory agencies have proposed new information that would clarify information about subprime loans.

Detailing the potential risks
The disclosures are designed to make the risks of adjustable-rate mortgages (ARMs) clear to people shopping for a home loan. One of the proposed pieces of information provides explanations of some key features common to ARMs, such as payment shock. Some of the concepts explained include a reduced initial interest rate, a balloon payment, and a prepayment penalty.

Press release
Proposed information and how to submit comments

The other proposed information is a chart that clearly lays out the potential consequences of a mortgage switching to a higher interest rate. The chart uses as an example an ARM that begins with a monthly payment of $1,531 but rises—through interest rate adjustments—to $2,370 after five years.

Public comment sought
The agencies proposing the new information are seeking comments from the public about the two illustrations.

August 23, 2007