www.hudclips.org U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D. C. 20410-8000 September 29, 1989 Mortgagee Letter 89-24 TO: ALL APPROVED MORTGAGEES SUBJECT: Insurance of Adjustable Rate Mortgages on Single Family Properties Section 251 of the National Housing Act The purpose of this letter is (1) to advise you of changes to the Adjustable Rate Mortgage (ARM) Program mandated by the publication on January 4, 1989, of a final rule at 54 FR 110-111 in the Federal Register; and (2) to provide you with a comprehensive summary (which will incorporate the most recent changes) of the major features of the Program, thereby superseding Mortgagee Letters 84-16, 84-28 , 85-24, 87-31, 88-7, 88-26, and paragraph 6 on page 2 of 88-2 . The effective date for the aforementioned rule is March 31, 1989. Notification of this date was published in the Federal Register on February 28, 1989. REGULATORY CHANGES Annual Adjustment Notice to the Mortgagor Previously, notice of any annual adjustment to the interest rate and monthly payment, increase or decrease, had to be given to the mortgagor at least 30 days prior to the change in payment. The new rule shortens the period for advance notice that a holder of an ARM must allow when it makes effective any annual adjustment; specifically, the rule revises 24 CFR 203.49(g) and 234.79(g) to change our annual disclosure requirement from "at least 30 days" to "at least 25 days" before a monthly payment at the new level is due. It is important to note that the date on which the new monthly payment is due is 30 days after the date at which the interest rate may be changed. The annual disclosure must be made each year, even if the interest rate or monthly payment does not change. This revision will conform HUD's disclosure requirement with the time frame required by the Federal Reserve Board in their Truth-in-Lending regulations ("Regulation Z") at 12 CFR 226.20(c). Existing insured mortgages provide for a 30 day notice. The new rule does not prohibit notice periods longer than 25 days and _____________________________________________________________________ 2 existing mortgagors have a contract right to the longer notice period. Thus, mortgagees should honor the terms of existing mortgages and apply the shorter notice period only if the revised Adjustable Rate Rider and Adjustable Rate Allonge Amending Note, Attachment I herein, are used. Elimination of Carryover As a result of the final rule published at 54 FR 110-111, portions of 24 CFR 203.49(e) and 234.79(e) that discuss carryover are eliminated. The purpose of this is to avoid confusion in the industry which has been caused by reference to a feature of the ARM program that has never been adopted in practice since the program was implemented in 1984. Consequently, with respect to the magnitude of change in interest rate allowed for an ARM, the procedure to be followed is simply a continuation of current practice: No single adjustment to the interest rate can result in a change in either direction of more than one percentage point from the interest rate in effect for the period immediately preceding that adjustment (the "annual cap"); and adjustments in the effective rate of interest over the entire term of the mortgage may not result in a change in either direction of more than five percentage points from the initial contract interest rate over the term of the mortgage (the "lifetime cap"). Amendments to Adjustable Rate Rider and Adjustable Rate Allonge Amending Note As a result of the elimination of carryover, and of the change in the period of time required to be given to the mortgagor concerning the annual disclosure, several changes are required in the Adjustable Rate Rider for new FHA insured adjustable rate mortgages, and in the Adjustable Rate Allonge Amending Note used with the Adjustable Rate Notes secured by new FHA insured adjustable rate mortgages. These changes are reflected at Attachment I herein, and also in the Notice on Requirements for Single Family Mortgage Instruments, published at 54 FR 27596 on June 29, 1989. _____________________________________________________________________ 3 The HUD Adjustable Rate Mortgage Disclosure Statement (Attachment III) has also been revised. The revised HUD Adjustable Rate Mortgage Disclosure Statement may be used immediately and must be used for all transactions involving sales contracts signed on or after November 1, 1989, unless a disclosure statement meeting criteria of the Federal Reserve Board's Truth-in-Lending regulations ("Regulation Z") is used (see discussion under "Loan Disclosure at Origination"). The revised Rider and Allonge may be used immediately and must be used for all transactions involving sales contracts signed on or after November 1, 1989. If the revised Rider and Allonge are used and the old HUD Adjustable Rate Mortgage Disclosure Statement was provided, the revised HUD Adjustable Rate Mortgage Disclosure Statement should be provided to the mortgagor at or before closing with an explanation that it supersedes the previous Disclosure Statement. MAJOR FEATURES OF THE HUD ARM PROGRAM Legislative History The Housing and Urban-Rural Recovery Act of 1983 (HURRA) added Section 251 to the National Housing Act authorizing HUD to insure adjustable rate mortgages (ARMs) on single family properties. The program became effective July 30, 1984. Eligible Sections, Borrowers, and Properties ARM loans originated under Sections 203(b), 203(k) (first lien only) and 234(c) are eligible for mortgage insurance. Direct Endorsement lenders may originate loans under Sections 203(b) and 234(c) only. The ARM program is limited to owner-occupants. Investors are not eligible. One-to-four family units are eligible under the ARM program as long as one of the units will be occupied by the mortgagor. _____________________________________________________________________ 4 Limited Insurance Authority Formerly the number of ARMs that HUD could insure was limited to 10 percent of the total number of endorsements for the previous fiscal year. The Housing and Community Development Act of 1987 raised this number to the current volume of 30 percent. As previously stated, ARMs may be processed under Direct Endorsement. After the mortgage credit analysis has been completed, but prior to notifying the applicant, the Direct Endorsement underwriter must contact the HUD Field Office for approval and to record the application against the ARM allocation in the Computerized Homes Underwriting Management System (CHUMS). Determination of Interest Rate The adjustable rate mortgage initial interest rate shall be negotiated by the mortgagee and the borrower. Subsequent adjustments to this interest rate must correspond to changes in the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year. Weekly average yields are published in the Federal Reserve Bulletin and are made available by the Federal Reserve Board in Statistical Release H.15(519). (Example at Attachment II.) This is a national index, which can be obtained from the Federal Reserve Board, by requesting to be placed on the mailing list for receipt of the weekly H.15 publication. The address is: Publications Services Mail Stop 138 Board of Governors Federal Reserve System Washington, DC 20551 The index is also published regularly in many newspapers, e.g. Wall Street Journal, USA Today. _____________________________________________________________________ 5 Frequency of Interest Rate Changes Interest rate adjustments to the ARM loan must occur on an annual basis, except that the first adjustment must occur no sooner than 12 months and no later than 18 months from the due date of the mortgagor's initial monthly payment. This six month window period is designed to facilitate the pooling of loans for sale in the secondary market. Subsequent interest rate adjustments will occur on each anniversary date of the first adjustment. The date of the interest rate change is called the "Change Date" by HUD, and the "Interest Adjustment Date" by the Government National Mortgage Association (GNMA). Caps on Interest Rate Changes No single adjustment to the interest rate can result in a change in either direction of more than one percentage point from the interest rate in effect for the period immediately preceding that adjustment (the "annual cap"). Adjustments in the effective rate of interest over the entire term of the mortgage may not result in a change in either direction of more than five percentage points from the initial contract interest rate (the "lifetime cap"). Method of Calculating Interest Rate Adjustments The mortgagee and the borrower negotiate the initial interest rate and margin. The margin must be constant for the entire term of the mortgage. To calculate the annual adjustments to the initial interest rate: a. Determine the current index. The proper date to be used for indexing an interest rate adjustment is stated in paragraph 3(a) of both the Adjustable Rate Rider and the Adjustable Rate Allonge Amending Note: "The amount of the Index will be determined, using the most recently available figure, thirty (30) days before the Change Date ('Current Index')." _____________________________________________________________________ 6 The index used, based on the weekly average yield on US Treasury securities adjusted to a constant maturity of 1 year, must be the one effective on the date thirty (30) exact days before the Change Date. The Federal Reserve Board Statistical Release H.15 is published weekly on Monday, or on Tuesday if Monday is a Federal holiday, and the index shown on that release is effective the day it is issued until the H.15 is issued the next week. The following are the proper indices to use when the 30th exact day falls on: (1) A Monday which is a business day. Use the index rate contained in the H.15 release issued that Monday, if the 30th exact day prior to a Change Date and the issue date of an H.15 release both occur on the same day, i.e., they both occur on a Monday. (2) A Monday which is a Federal holiday. Use the index in the H.15 release issued the prior week if the 30th exact day before the Change Date falls on a Monday which is a Federal holiday. (3) A day of the week other than Monday. Use the index in the H.15 release issued on the Monday of that week (or issued on Tuesday if that Monday is a Federal holiday). For example, for an April 1, 1989 Change Date, 30 exact days before April 1 is Thursday, March 2. The correct index to use is the one contained in the H.15 release issued on Monday of that week, which is February 27 (see Attachment II). _____________________________________________________________________ 7 b. Determine the calculated interest rate. This is the current index plus the margin (the number of basis points identified as "margin" in paragraph 3(b) of the Adjustable Rate Rider and the Adjustable Rate Allonge Amending Note) rounded to the nearest 1/8th of one percentage point (0.125 percent). Since mortgages placed into GNMA pools must be rounded to the nearest 1/8th of one percent at each Interest Adjustment Date, the Adjustable Rate Mortgage Rider and Adjustable Rate Allonge Amending Note comply with GNMA's requirements. However, item 3 of Attachment I provides lenders with the necessary modifications to the Rider and Allonge if the loan will not be placed in a GNMA pool and the lender does not want to round the interest rate to the nearest 1/8th of one percent. Rounding is required unless the Rider and Allonge have been modified to delete the provision for rounding. c. Compare the calculated interest rate (index plus margin, rounded to the nearest 1/8th of one percent) to the existing interest rate (rate in effect for the preceding 12 months) to determine the new adjusted interest rate as follows: (1) If the calculated interest rate is equal to the existing interest rate, the adjusted interest rate will not change. (2) If the calculated interest rate is equal to or less than one percent (100 basis points) higher or lower than the existing interest rate, the calculated interest rate will become the new adjusted interest rate. _____________________________________________________________________ 8 (3) If the new calculated interest rate is more than one percent (100 basis points) higher or lower than the existing interest rate, the new adjusted interest rate will be limited to one percent higher or lower than the existing interest rate. d. In no event may any resulting Adjusted Interest Rate be more than five percentage (5 percent) points higher or lower than the initial interest rate at settlement. e. An Adjusted Interest Rate becomes effective on the Change Date (the date is specified in paragraph 2 of both the Rider and Allonge) and thereafter will be deemed to be the existing interest rate. The new existing interest rate will remain in effect until the next Change Date. During the term of the mortgage each adjustment will be effective on the same date of each succeeding year. Computation of the Monthly Installment If there is a new interest rate on the mortgage as a result of the above calculations, a new monthly payment must be determined. The monthly payment attributable to principal and interest will be calculated by determining the amount that is necessary to fully amortize the unpaid principal balance during the remaining term of the mortgage. For this purpose, the unpaid principal balance shall mean that which would be due on the Change Date if there had been no default in any payment, but reduced by the amount of any prepayments to principal. (Accordingly, mortgagee must credit all eligible prepayments, but must not debit any delinquency.) Escrow requirements will then be added to principal and interest to arrive at the new monthly payment. Since interest is payable on the first day of the month following the month in which it accrued, the borrower will begin to pay the new monthly payment 30 days after the Change Date, provided the borrower is given proper notice as required under the Annual Disclosure section of this Mortgagee Letter. _____________________________________________________________________ 9 All ARM adjustments affect interest percentages only, no negative amortization may occur. Loan Disclosure at Origination The lender must disclose to the borrower the nature of the ARM loan at the time of loan application. In order to meet this requirement, mortgagees may use either the HUD Adjustable Rate Mortgage Disclosure Statement (Attachment III) or a disclosure statement that meets the criteria of the Federal Reserve Board's Truth-in-Lending regulations ("Regulation Z") at 12 CFR Part 226. (The specific Federal Reserve Board disclosure requirements may be found in Section 226.19(b).) If the HUD ARM Disclosure Statement is used, mortgagees may use the 30 year principal and interest payment factors with the original mortgage amount to calculate the payments for years 2 through 6. Annual Disclosure Requirements There are two basic steps which the mortgagee must take each year with respect to the interest rate adjustment. a. Step 1: Make the computation to adjust the interest rate and the monthly payments. The first adjustment to the interest rate will become effective on the day specified in paragraph 2 of the Rider or the Allonge (Change Date) and thereafter each adjustment will be effective on the same date of each succeeding year during the term of the mortgage. (As previously noted, the date on which the new monthly payment is due is 30 days after the Change Date.) b. Step 2: Notify the mortgagor of any change in the interest rate and monthly payment. _____________________________________________________________________ 10 The mortgagee's obligation to compute, adjust the interest rate, and give notice to the mortgagor on the prescribed dates, is not affected by delinquencies or foreclosures so long as the mortgage debt exists. It is the mortgagee's responsibility to see that its collection actions continually update the mortgage debt. Notice of any adjustment to the interest rate and monthly payment, increase or decrease, must be given to the mortgagor at least 25 days prior to the change in payment. (If the mortgage provides for 30 days notice, that provision must be followed.) Our rule concerning the timing of the annual notice of adjustment is consistent with Federal Home Loan Bank Board (FHLBB) regulations and policy. The Adjustment Notice must contain (a) the date the Adjustment Notice is given, (b) the Change Date, (c) the current interest rate, (d) the new Existing Interest Rate (which is the Adjusted Interest Rate) as adjusted on the Change Date, (e) the current Index and the date it was published, (f) the method of calculating the adjustment to the monthly payments, (g) the amount of the adjusted monthly payments, and (h) any other information which may be required by law from time to time. The Notice should contain other relevant information such as an explanation of why a new Existing Interest Rate is less than the Calculated Interest Rate when the 5 percent cap is reached. The content of the annual disclosure notice may meet the criteria of either 24 CFR 203.49(g) and 234.79(g), or the criteria of the Federal Reserve Board in Regulation Z at 12 CFR 226.20(c). The suggested format for providing the annual disclosure notice which appears at Attachment IV is designed to comply with HUD regulations. _____________________________________________________________________ 11 It is suggested that the Notice be sent to the mortgagor by Certified Mail, Return Receipt Requested. However, a Notice addressed and mailed via first class mail to all property owners identified on the mortgagee's records shall be sufficient unless the mortgagors' whereabouts are known to be elsewhere. A Notice must be given each year, even if the interest rate does not change. For HUD review purposes, lenders must keep evidence that timely notice has been given, and evidence of the annual adjustment computations, for the mortgage term. A file copy of the suggested HUD annual disclosure notice will be sufficient to satisfy this requirement. However, should disputes arise as to timely notice or as to the annual adjustment computations, compliance with our suggested methods may not satisfy local legal interpretations of the mortgage provisions in determining whether the evidence was sufficient. Lenders should, therefore, be guided by the advice of counsel in matters concerning the type and duration of record retention. The mortgagee's collection personnel should be alerted to the prospect of Notice not being received by the mortgagor, and should take appropriate remedial action when necessary. If the mortgagor's payments do not reflect the increase or decrease recited in the Notice, a follow-up should be made to assure that the Notice was received. Failure to Provide Timely Notice If the mortgagee fails to provide notice for more than one year, an Existing Interest Rate must be determined for each omitted year because the calculations for each year affect the rate for subsequent years. The one percent and five percent limitations are applicable each year and must be taken into consideration in determining the new Existing Interest Rate. The mortgagee's failure to provide Notice in advance of each Change Date results in penalties (to be found in the ARM Rider and Allonge) to the mortgagee. _____________________________________________________________________ 12 Although the interest rate may change, the mortgagee is prevented from collecting any increase in payments until the Notice has been provided at least 25 days prior to any new payments becoming effective (or 30 days, if the mortgage so provides). If timely notice is not provided, the lender forfeits its right to collect the increased amount and the borrower is relieved from the obligation to pay that increase. In the event that the adjusted rate were to decline, the failure to provide Notice would result in overpayments until the mortgage rate was properly adjusted. In such case, the mortgagee must refund the excess with interest, at a rate equal to the sum of the Margin and the Index in effect on the Change Date, from the date of the excess payment to the date of repayment. The borrower has the option of a cash refund or application of the excess to the unpaid principal balance of the mortgage, after application of the refund to any existing delinquency. Failure to Provide Accurate Notice If the mortgagee miscalculates the interest rate and/or the monthly payment, and the error(s) are reflected in the Annual Notice, HUD takes the position that the errors need to be corrected. However, HUD takes no position as to whether an erroneous Notice would constitute a failure to provide notice under the terms of the mortgage contract. This is a legal matter subject to local law and court interpretation. Sales, Assignments and Transfers of Servicing Among Mortgagees It is the responsibility of the transferor (seller) to provide the transferee with complete servicing records which reflect all annual ARM requirements as having been met. Although HUD regulations require the transferee/assignee to assume all servicing obligations, we do not intend that a negligent ARM mortgagee-transferor be permitted to avoid its disclosure obligations. In the event that a failure of Notice or other error is discovered, it shall be the responsibility of the mortgagee transferor who was holding the loan when the failure occurred, to reimburse the mortgagee currently holding the loan, where any burden of refund to the mortgagor is required. _____________________________________________________________________ 13 Underwriting and Processing The ARM loan will be processed and underwritten using the initial interest rate negotiated between the lender and borrower, as stated in the Form HUD-92900, Application for Commitment and Insurance. Mortgage credit processing shall be in accordance with existing instructions as modified below: a. An adjustable rate mortgage disclosure statement, signed by all borrowers, must accompany the Form HUD-92900, Application for HUD/FHA Insured Mortgage. As previously stated, mortgagees may use either the HUD Adjustable Rate Mortgage Disclosure Statement (Attachment III) or a disclosure statement that meets the criteria of the Federal Reserve Board's Truth-in-Lending regulations ("Regulation Z"). If the HUD ARM Disclosure Statement is not used, it is necessary for lenders to provide borrowers with the standard HUD disclosure statement concerning the unregulated HUD interest rate and discount points. b. Consistent with existing policy, the initial interest rate of an ARM may increase up to one percentage point above that shown on the commitment (Direct Endorsement underwriter approval of the borrower), before reprocessing is required by HUD (Direct Endorsement lender). c. ARMS insured under Section 203(b) are subject to the one-time mortgage insurance premium. The MIP factors and the calculations for ARMS are the same as for fixed rate loans. On ARM loans insured under Section 234(c) and Section 203(k), the Department will collect the MIP based on the monthly MIP figures for the initial interest rate throughout the term of the loan. _____________________________________________________________________ 14 d. See Handbook 4000.4 REV-1, Single Family Direct Endorsement Program, dated September 1988, to identify the applicable underwriter certifications. e. The initial interest rate, the margin, the date of the first adjustment to the interest rate and the frequency of adjustments must be specified in the mortgage documents. Modifications to HUD's mortgage documents may be found at Attachment I. However, each mortgagee is responsible for ascertaining whether or not the provisions contained in the attached documents are permissible under local and State law. In the event of any perceived conflict with local or State law, you should contact the Office of General Counsel, Home Mortgage Division, HUD Headquarters, to discuss such potential conflict and for further instructions. f. For an ARM associated with an interest rate buydown, the underwriting will be based upon the interest rate before applying the buydown. The buydown will only be considered as a compensating factor. With regard to the caps, they are determined exclusive of any temporary buydown. The five percent cap is based on the rate in the mortgage documents. The one percent annual cap is determined from the existing interest rate on the loan. It is the mortgagee's responsibility to explain to the borrower the impact of the buydown on the borrower's repayment schedule. If there is a permanent buydown, the underwriting will be based on the rate in the application. g. ARMs may not be used with Shared Equity loans. h. ARMs will be limited to only a 30-year term. i. This Mortgagee Letter does not apply to Home Equity Conversion Mortgage ARMs. _____________________________________________________________________ 15 Assumptions Lenders should encourage sellers to disclose the terms of an ARM in any sales transaction; however, when an assumption will take place both the seller and the lender should assume responsibility for notifying the purchaser (assumptor) about the conditions of the ARM. As soon as the lender becomes aware of an assumption and has the name of the purchaser, he should provide the purchaser with a copy of the original Disclosure Statement with an explanatory letter addressing the ARM mortgage conditions. Request for acknowledgment of the receipt of this information is advisable. For assumption transactions which require a creditworthiness review or in cases where a release from personal liability is requested and approved, the lender must prepare a new Disclosure Statement to ensure that the purchaser is aware of the ARM obligation. Processing of the HUD 2210, Request for Credit Approval of Substitute Mortgagor and/or FHA Form 2210-1, Approval of Purchaser and Release of Seller, must be based on the existing interest rate in effect at the time the complete credit review package is submitted to HUD or to the DE Underwriter. Statistical Information To track ARM activity, HUD has established case number suffix codes (Section of the Act ADP Codes) which should be indicated on all firm commitment applications (Form HUD-92900) and which are printed on computer generated mortgage insurance certificates (Form 59100). There will be different suffix codes for HUD processed cases, HUD processed cases with VA CRVs and all Direct _____________________________________________________________________ 16 Endorsement cases. The following chart has been prepared to assist your staff: Eligible Section of the Section of the Section of the Program Act Suffix Act Suffix Act Suffix Code - HUD Code - HUD Code - Direct Processed Case Processed Case Endorsement with VA-CRV _______________________________________________________________ 203(b) 229 529 729 203(k) first 230 530 730 lien 234(c) 231 531 731 Definitions Attachment V incorporates definitions of some of the principal ARM terms. If you have any questions concerning this Mortgagee Letter, you may contact the Single Family Development Division, HUD Headquarters, (202) 426-7212, regarding ARM origination issues; or the Single Family Servicing Division, HUD Headquarters, (202) 755-6672 regarding ARM servicing issues. Sincerely, C. Austin Fitts Assistant Secretary for Housing Federal Housing Commissioner Attachments ATTACHMENT I 1. Forms are attached hereto for (a) an Adjustable Rate Rider, and (b) an Adjustable Rate Allonge Amending Note. These forms contain all of the provisions necessary to comply with the National Housing Act and the regulations promulgated in connection therewith. However, prior to the origination of any adjustable rate loan under Section 203(b), 203(k) or 234(c), each lender is responsible for ascertaining whether or not the provisions contained in the attached forms are permissible under, and are in compliance with, local and State law. Accordingly, all lenders should have qualified legal counsel review the attached forms. In the event of any perceived conflict between the provisions contained in the attached forms and the requirements of local or State law, you should contact the Office of General Counsel, Home Mortgage Division, HUD Headquarters, for further instructions, prior to the origination of any adjustable rate mortgage. 2. The following are instructions for MANDATORY modifications to the existing FHA Note and Mortgage Forms for all States, to create adjustable rate mortgage documents. If applicable State law requires that contemporaneously executed Riders or Allonges be notarized, the appropriate notarization should be added. a. Mortgage Instrument (i) On page one, after the words "with interest at the rate of _______ per centum (______%) per annum," and again after the words "in monthly installments of _______ Dollars ($_____)," type in the following words: "See Adjustable Rate Rider." (ii) Above the final sentence of the document which is before the signature lines for the Mortgagors, type in capital letters: "SEE ADJUSTABLE RATE RIDER ATTACHED HERETO AND MADE A PART HEREOF FOR ADDITIONAL TERMS, COVENANTS AND CONDITIONS OF THIS MORTGAGE." (Substitute "Deed of Trust" or "Security Deed" for the word "Mortgage", where applicable.) _____________________________________________________________________ 2 Where space limitations prohibit typing the above sentence as directed, type the sentence in the margin (or below the signature lines, if necessary) with an asterisk for identification placed both at the beginning of the sentence and the location where the sentence would have been typed if space permitted. (If necessary, use the same procedure of typing in the margin and using asterisks, for adding the words "See Adjustable Rate Rider.") (iii) Attach the Adjustable Rate Rider, with all blanks properly completed. (iv) For loans originated under Section 203(b), be certain that the mortgage form you use provides for the one-time mortgage insurance premium (MIP) payment. b. Note: (i) After the words "with interest from date at the rate of _____ per centum (_____%) per annum," and again after the words "monthly installment as follows: _____________ Dollars ($_____)," type in the following words: "See Adjustable Rate Allonge Amending Note." (ii) Above the final sentence of the Note which is before the signature lines for the Borrowers, type in capital letters: "SEE ADJUSTABLE RATE ALLONGE AMENDING NOTE ATTACHED HERETO AND MADE A PART HEREOF FOR ADDITIONAL ITEMS, COVENANTS AND CONDITIONS OF THIS NOTE, INCLUDING, WITHOUT LIMITATION, PROVISIONS FOR ADJUSTING THE INTEREST RATE AND MONTHLY PAYMENTS." At the mortgagee's discretion, the language following "HEREOF" may be deleted. _____________________________________________________________________ 3 Where space limitations prohibit typing the above sentence as directed, type the sentence in the margin (or below the signatures, if necessary) with an asterisk for identification placed both at the beginning of the sentence and the location where the sentence would have been typed if space permitted. (If necessary, use the same procedure, of typing in the margin and using asterisks, for adding the words "See Adjustable Rate Allonge Amending Note.") (iii) Attach the Adjustable Rate Allonge Amending Note, will all blanks properly completed. 3. The following are instructions for OPTIONAL modifications to the Adjustable Rate Rider and Adjustable Rate Allonge Amending Note (which are attached hereto), to be used if you do not want to round out the amount of the interest rate charged to the Borrower. THIS MODIFICATION DOES NOT COMPLY WITH GNMA REQUIREMENTS AND SHOULD NOT BE MADE TO ANY MORTGAGE WHICH WILL BE PLACED IN A GNMA POOL. (a) Adjustable Rate Rider. Delete paragraph 3(b) of the Adjustable Rate Rider and substitute the following paragraph in its place: "(b) _____ percentage points (_____%; the "Margin") will be added to the Current Index. The sum, of the Margin plus the Current Index, will be called the "Calculated Interest Rate" for each Change Date." (b) Adjustable Rate Allonge Amending Note. Delete paragraph 3(b) of the Adjustable Rate Allonge Amending Note and substitute the following paragraph in its place: "(b) _____ percentage points (_____%; the "Margin") will be added to the Current Index. The sum, of the Margin plus the Current Index, will be called the "Calculated Interest Rate" for each Change Date." _____________________________________________________________________ 4 For use only with an Adjustable Rate Mortgage, Deed of Trust or Security Deed insured under Section 203(b), 203(k) (first lien only) or 234(c) of the National Housing Act. ADJUSTABLE RATE RIDER THIS ADJUSTABLE RATE RIDER is made this _____________ day of _________, 19____, and is incorporated into and shall be deemed to amend and supplement the Mortgage, Deed of Trust or Security Deed ("Mortgage"), of even date herewith, given by the undersigned ("Mortgagor") to secure Mortgagor's Adjustable Rate Note ("Note"), of even date herewith, to ________________________________________ ("Mortgagee"), covering the premises described in the Mortgage and located at _______________________________________________________ ___________________. Notwithstanding anything to the contrary set forth in the Mortgage, Mortgagor and Mortgagee hereby agree to the following: 1. Under the Note, the initial stated interest rate of _____ per centum (_____%) per annum ("Initial Interest Rate") on the unpaid principal balance is subject to change, as hereinafter described. When the interest rate changes, the equal monthly installments of principal and interest also will be adjusted, as hereinafter provided, so that each installment will be in an amount necessary to fully amortize the unpaid principal balance of the Note, at the new adjusted interest rate, over the remaining term of the Note. _____________________________________________________________________ 5 2. The first adjustment to the interest rate (if any adjustment is required) will be effective on the first day of _________, 19__ (which date will not be less than twelve months nor more than eighteen months from the due date of the first installment payment under the Note), and thereafter each adjustment to the interest rate will be made effective on that day of each succeeding year during the term of the Mortgage ("Change Date"). 3. Each adjustment to the interest rate will be made based upon the following method of employing the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year ("Index"; the Index is published in the Federal Reserve Bulletin and made available by the United States Treasury Department in Statistical Release H.15 (519)). As of each Change Date, it will be determined whether or not an interest rate adjustment must be made, and the amount of the new adjusted interest rate, if any, as follows: (a) The amount of the Index will be determined, using the most recently available figure, thirty (30) days before the Change Date ("Current Index"). (b) _____ percentage points (_____%; the "Margin") will be added to the Current Index and the sum of this addition will be rounded to the nearest one-eighth of one percentage point (0.125%). The rounded sum, of the Margin plus the Current Index, will be called the "Calculated Interest Rate" for each Change Date. (c) The Calculated Interest Rate will be compared to the interest rate being earned immediately prior to the current Change Date (such interest rate being called the "Existing Interest Rate"). Then, the new adjusted interest rate, if any, will be determined as follows: _____________________________________________________________________ 6 (i) If the Calculated Interest Rate is the same as the Existing Interest Rate, the interest rate will not change. (ii) If the difference between the Calculated Interest Rate and the Existing Interest Rate is less than or equal to one percentage point, the new adjusted interest rate will be equal to the Calculated Interest Rate (subject to the maximum allowable change over the term of the Mortgage of five percentage points, in either direction, from the Initial Interest Rate, herein called "5% Cap"). (iii) If the Calculated Interest Rate exceeds the Existing Interest Rate by more than one percentage point, the new adjusted interest rate will be equal to one percentage point higher than the Existing Interest Rate (subject to the 5% Cap). (iv) If the Calculated Interest Rate is less than the Existing Interest Rate by more than one percentage point, the new adjusted interest rate will be equal to one percentage point less than the Existing Interest Rate (subject to the 5% Cap). (d) Notwithstanding anything contained in this Adjustable Rate Rider, in no event will any new adjusted interest rate be more than five percentage (5%) points higher or lower than the Initial Interest Rate. If any increase or decrease in the Existing Interest Rate would cause the new adjusted interest rate to exceed the 5% cap, the new adjusted interest rate will be limited to five percentage (5%) points higher or lower, whichever is applicable, than the Initial Interest Rate. _____________________________________________________________________ 7 (e) Mortgagee will perform the functions required under Subparagraphs 3(a), (b) and (c) to determine the amount of the new adjusted rate, if any. Any such new adjusted interest rate will become effective on the Change Date and thereafter will be deemed to be the Existing Interest Rate. The new Existing Interest Rate will remain in effect until the next Change Date on which the interest rate is adjusted. (f) If the Index is no longer available, Mortgagee will be required to use any index prescribed by the Department of Housing and Urban Development. Mortgagee will notify Mortgagor in writing of any such substitute index (giving all necessary information for Mortgagor to obtain such index) and after the date of such notice the substitute index will be deemed to be the Index hereunder. 4. (a) If the Existing Interest Rate changes on any Change Date, Mortgagee will recalculate the monthly installment payments of principal and interest to determine the amount which would be necessary to repay in full, on the maturity date, the unpaid principal balance (which unpaid principal balance will be deemed to be the amount due on such Change Date assuming there has been no default in any payment on the Note but that all prepayments on the Note have been taken into account), at the new Existing Interest Rate, in equal monthly payments. At least 25 days before the date on which a monthly payment at the new level is due, Mortgagee will give Mortgagor written notice ("Adjustment Notice") of any change in the Existing Interest Rate and of the revised amount of the monthly installment payments of principal and interest, calculated as provided above. Each Adjustment Notice will set forth (i) the date the Adjustment Notice is given, (ii) the Change Date, (iii) the current interest rate, (iv) the new Existing Interest Rate as adjusted on the Change Date, _____________________________________________________________________ 8 (v) the amount of the adjusted monthly installment payments, calculated as provided above, (vi) the Current Index and the date it was published, (vii) the method of calculating the adjustment to the monthly installment payments, and (viii) any other information which may be required by law from time to time. (b) Mortgagor agrees to pay the adjusted monthly installment amount beginning on the first payment date which occurs at least twenty-five (25) days after Mortgagee has given the Adjustment Notice to Mortgagor. Mortgagor will continue to pay the adjusted monthly installment amount set forth in the last Adjustment Notice given by Mortgagee to Mortgagor until the first payment date which occurs at least twenty-five (25) days after Mortgagee has given a further Adjustment Notice to Mortgagor. Notwithstanding anything to the contrary contained in this Adjustable Rate Rider or the Mortgage, Mortgagor will be relieved of any obligation to pay, and Mortgagee will have forfeited its right to collect, any increase in the monthly installment amount (caused by the recalculation of such amount under Subparagraph 4(a)) for any payment date occurring less than twenty-five (25) days after Mortgagee has given the applicable Adjustment Notice to Mortgagor. (c) Notwithstanding anything contained in this Adjustable Rate Rider, in the event that (i) the Existing Interest Rate was reduced on a Change Date, and (ii) Mortgagee failed to give the Adjustment Notice when required, and (iii) Mortgagor, consequently, has made any monthly installment payments in excess of the amount which would have been set forth in such adjustment Notice ("Excess Payments"), then Mortgagor, at Mortgagor's sole option, may either (1) demand the return from Mortgagee (who for the purposes of this sentence will be deemed to be the mortgagee, or mortgagees, who received such Excess Payments, whether or not any such mortgagee subsequently assigned the Mortgage) of all or any _____________________________________________________________________ 9 portion of such Excess Payments, with interest thereon at a rate equal to the sum of the Margin and the Index on the Change Date when the Existing Interest Rate was so reduced, from the date each such Excess Payment was made by Mortgagor to repayment, or (2) request that all or any portion of such Excess Payments, together with all interest thereon calculated as provided above, be applied as payments against principal. 5. Nothing contained in this Adjustable Rate Rider will permit Mortgagee to accomplish an interest rate adjustment through an increase (or decrease) to the unpaid principal balance. Changes to the Existing Interest Rate may only be reflected through adjustment to Mortgagor's monthly installment payments of principal and interest, as provided for herein. BY SIGNING BELOW, Mortgagor accepts and agrees to the terms and covenants contained in this Adjustable Rate Rider. _________________________ (Seal) Mortgagor _________________________ (Seal) Mortgagor _____________________________________________________________________ 10 For use only with an Adjustable Rate Note secured by a Mortgage, Deed of Trust or Security Deed insured under Section 203(b), 203(k) (first lien only) or 234(c) of the National Housing Act. ADJUSTABLE RATE ALLONGE AMENDING NOTE THIS ADJUSTABLE RATE ALLONGE is an AMENDMENT made this ____ day of ________, 19____, and is incorporated into and shall be deemed to amend and supplement the Note ("Note"), of even date herewith, given by the undersigned ("Borrower") to evidence Borrower's indebtedness to __________________________________ ("Holder"), which indebtedness is secured by that certain Mortgage, Deed of Trust or Security Agreement ("Mortgage"), of even date herewith, covering the premises described in the Mortgage and located at _________________________________. Notwithstanding anything to the contrary set forth in the Mortgage, Borrower hereby agrees to the following: 1. The interest rate stated in the Note, of _____ per centum (_____%) per annum ("Initial Interest Rate"), is subject to change as hereinafter provided. Borrower promises to pay, on the unpaid principal amount, interest at the rate in effect from time to time, as adjusted in accordance with the provisions of this Amendment, in monthly installments of principal and interest as provided in Paragraph 4. When the interest rate changes, the equal monthly installments of principal and interest also will be adjusted, as hereinafter provided, so that each installment will be in an amount necessary to fully amortize the unpaid principal balance of _____________________________________________________________________ 11 the Note, at the new adjusted interest rate, over the remaining term of the Note. Borrower agrees to pay to the order of Holder the amount of all such adjusted monthly installments, provided that Borrower is notified of such adjustments as hereinafter required. 2. The first adjustment to the interest rate (if any adjustment is required) will be effective on the first day of _________, 19____ (which date will not be less than twelve months nor more than eighteen months from the due date of the first installment payment under the Note), and thereafter each adjustment to the interest rate will be made effective on that day of each succeeding year during the term of the Note ("Change Date"). 3. Each adjustment to the interest rate will be made based upon the following method of employing the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year ("Index"; the Index is published in the Federal Reserve Bulletin and made available by the United States Treasury Department in Statistical Release H. 15 (519)). As of each Change Date, it will be determined whether or not an interest rate adjustment must be made, and the amount of the new adjusted interest rate, if any, as follows: (a) The amount of the Index will be determined, using the most recently available figure, thirty (30) days before the Change Date ("Current Index"). (b) ____ percentage points (_____%; the "Margin") will be added to the Current Index and the sum of this addition will be rounded to the nearest one-eighth of one percentage point (0.125%). The rounded sum, of the Margin plus the Current Index, will be called the "Calculated Interest Rate" for each Change Date. (c) The Calculated Interest Rate will be compared to the interest rate being earned immediately prior to the current Change Date (such interest rate being called the "Existing Interest Rate"). Then, the new adjusted interest rate, if any, will be determined as follows: _____________________________________________________________________ 12 (i) If the Calculated Interest Rate is the same as the Existing Interest Rate, the interest rate will not change. (ii) If the difference between the Calculated Interest Rate and the Existing Interest Rate is less than or equal to one percentage point, the new adjusted interest rate will be equal to the Calculated Interest Rate (subject to the maximum allowable change over the term of the Note of five percentage points, in either direction, from the Initial Interest Rate, herein called the "5% cap"). (iii) If the Calculated Interest Rate exceeds the Existing Interest Rate by more than one percentage point, the new adjusted interest rate will be equal to one percentage point higher than the Existing Interest Rate (subject to the 5% cap). (iv) If the Calculated Interest Rate is less than the Existing Interest Rate by more than one percentage point, the new adjusted interest rate will be equal to one percentage point less than the Existing Rate (subject to the 5% cap). (d) Notwithstanding anything contained in this Amendment, in no event will any new adjusted interest rate be more than five percentage (5%) points higher or lower than the Initial Interest Rate. If any increase or decrease in the Existing Interest Rate would cause the new adjusted interest rate to exceed the 5% cap, the new adjusted interest rate will be limited to five percentage (5%) points higher or lower, whichever is applicable, than the Initial Interest Rate. (e) Holder will perform the functions required under Subparagraphs 3(a), (b) and (c) to determine the amount of the new adjusted rate, if any. Any such new adjusted interest rate will become effective on the Change Date and thereafter will be deemed to be the Existing Interest Rate. The new Existing Interest Rate will remain in effect until the next Change Date on which the interest rate is adjusted. _____________________________________________________________________ 13 (f) If the Index is no longer available, Holder will be required to use any index prescribed by the Department of Housing and Urban Development. Holder will notify Borrower in writing of any such substitute index (giving all necessary information for Borrower to obtain such index) and after the date of such notice the substitute index will be deemed to be the Index hereunder. 4. (a) If the Existing Interest Rate changes on any Change Date, Holder will recalculate the monthly installment payments of principal and interest to determine the amount which would be necessary to repay in full, on the maturity date, the unpaid principal balance (which unpaid principal balance will be deemed to be be the amount due on such Change Date assuming there has been no default in any payment on the Note but that all prepayments on the Note have been taken into account), at the new Existing Interest Rate, in equal monthly payments. At least 25 days before the date on which a monthly payment at the new level is due, Holder will give Borrower written notice ("Adjustment Notice") of any change in the Existing Interest Rate and of the revised amount of the monthly installment payments of principal and interest, calculated as provided above. Each Adjustment Notice will set forth (i) the date the Adjustment Notice is given, (ii) the Change Date, (iii) the current interest rate, (iv) the new Existing Interest Rate as adjusted on the Change Date, (v) the amount of the adjusted monthly installment payments, calculated as provided above, (vi) the Current Index and the date it was published, (vii) the method of calculating the adjustment to the monthly installment payments, and (viii) any other information which may be required by law from time to time. (b) Borrower agrees to pay the adjusted monthly installment amount beginning on the first payment date which occurs at least twenty-five (25) days after Holder has given the Adjustment Notice to Borrower. Borrower will continue to pay _____________________________________________________________________ 14 the adjusted monthly installment amount set forth in the last Adjustment Notice given by Holder to Borrower until the first payment date which occurs at least twenty-five (25) days after Holder has given a further Adjustment Notice to Borrower. Notwithstanding anything to the contrary contained in this Amendment or the Note, Borrower will be relieved of any obligation to pay, and Holder will have forfeited its right to collect, any increase in the monthly installment amount (caused by the recalculation of such amount under Subparagraph 4(a)) for any payment date occurring less than twenty-five (25) days after Holder has given the applicable Adjustment Notice to Borrower. (c) Notwithstanding anything contained in this Amendment, in the event that (i) the Existing Interest Rate was reduced on a Change Date, and (ii) Holder failed to give the Adjustment Notice when required, and (iii) Borrower has, consequently, made any monthly installment payments in excess of the amount which would have been set forth in such adjustment Notice ("Excess Payments"), then Borrower, at Borrower's sole option, may either (1) demand the return from Holder (who for the purposes of this sentence will be deemed to be the holder, or holders, who received such Excess Payments, whether or not any such holder subsequently assigned the Note and Mortgage) of all or any portion of such Excess Payments, with interest thereon at a rate equal to the sum of the Margin and the Index on the Change Date when the Existing Interest Rate was so reduced, from the date each such Excess Payment was made by Borrower to repayment, or (2) request that all or any portion of such Excess Payments, together with all interest thereon calculated as provided above, be applied as payments against principal. 5. Nothing contained in this Amendment will permit Holder to accomplish an interest rate adjustment through an increase (or decrease) to the unpaid principal balance. Changes to the Existing Interest Rate may only be reflected through adjustment to Borrower's monthly installment payments of principal and interest, as provided for herein. _____________________________________________________________________ 15 6. If more than one person has signed the Note and this Amendment, each person is jointly and severally liable for all of the obligations under the note as modified by this Amendment and, therefore, each person is fully and personally obligated to fulfill all of the promises made in the Note and this Amendment, including, without limitation, payment of the entire amount owed (except as provided under Subparagraph 4(b)). BY SIGNING BELOW, Borrower accepts and agrees to the terms and covenants contained in this Amendment. ________________________ (Seal) ___ Borrower ________________________ (Seal) Borrower ATTACHMENT III ADJUSTABLE RATE MORTGAGE DISCLOSURE STATEMENT IMPORTANT MORTGAGE LOAN INFORMATION PLEASE READ CAREFULLY You must receive this statement and be given an opportunity to read it prior to the time you sign the "Borrowers Certification" on the loan application, Form HUD-92900.1. ADJUSTABLE RATE MORTGAGE MEANS YOUR PAYMENT MAY CHANGE IN THE FUTURE You are applying for an Adjustable Rate Mortgage (ARM) loan. This means that your interest rate and monthly payments may change during the life of your loan. Your monthly payments will increase if the interest rate rises and decrease if it falls. An ARM is different from a fixed rate mortgage loan. For fixed rate loan, the monthly payments of principal and interest do not change during the life of the loan. You should consider carefully which type of loan is best for you. ARM LOAN TERMS There are six important factors in an ARM loan. They are the initial interest rate, margin, discount points, frequency of rate adjustment, index used to calculate interest rate adjustments and caps on interest rate increases. Since all FHA ARM loans have the same index, caps, and frequency of rate adjustment, you should pay particular attention to the initial interest rate, margin and discount points that different lenders charge when shopping for an ARM loan. These three items are freely negotiable between you and the lender. In addition, you can negotiate the length of time before your loan closes during which these terms are guaranteed not to change. However, lenders sometimes require a commitment fee for "locking in" loan terms for a designated period (for example, 30, 60, or 90 days). _____________________________________________________________________ 2 INITIAL INTEREST RATE This is the interest rate that will be charged for the first year of your mortgage and may remain in effect from l2 to 18 months, depending on the terms of your particular loan. The lender must disclose, in the mortgage documents at closing, when this initial interest rate will change. The date on which the interest rate changes is the same each year and is called the Change Date. After the initial period, the interest rate on your mortgage may change on the change date every year you have this ARM loan. However, you must have been given at least 25 days notice before you must pay any changed amount in your monthly payment. In this notice, the lender must also tell you the amount of the index and how your interest rate and monthly payments will be affected. MARGIN The margin is a percentage that is added to the current index to establish the annual interest rate on your ARM. The amount of the margin will remain constant for the life of the mortgage. The larger the margin, the more interest you will pay on your loan. Since the margin affects the interest rate for every year but the first one, you should make certain that the margin being charged is reasonable. A slightly lower initial interest rate may prove more costly to you if a higher margin is being charged than you can obtain from other lenders. DISCOUNT POINTS Discount points are a one time fee charged at closing by the lender to increase the lender's yield on the loan. Each discount point is one percent of the loan amount. This fee will be paid by you unless the seller has agreed (in your written agreement) to pay all or part of these discount points. _____________________________________________________________________ 3 INDEX After the first year, the annual changes in the interest rate charged on your ARM will be tied to the weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year (One Year Treasury Constant Maturities). This is a national index published by the Federal Reserve Board in Statistical Release H.15(519). You may request to be placed on the mailing list to receive copies of this weekly publication by writing: Publication Services Mail Stop 138 Board of Governors Federal Reserve System Washington, DC 20551 The index is also published regularly in many newspapers, e.g. Wall Street Journal, USA Today. CAPS ON INTEREST RATE CHANGES Your interest rate cannot increase (or decrease) more than one percentage point per year and cannot increase (or decrease) more than five percentage points from the initial interest rate on your loan, no matter how much the index may have moved. METHOD OF CALCULATING ANNUAL INTEREST RATE ADJUSTMENTS Each year, on the Change Date, the lender will adjust the interest rate on your loan. The lender will check the most recent weekly index available 30 days before the change date and add to it the amount of the margin (index plus margin equals the calculated interest rate). Unless your mortgage documents provide otherwise, the calculated interest rate will be rounded to the nearest 1/8th percent. The calculated interest rate is compared to the existing interest rate (the rate you have been paying for the last year) and subject to the 5 percent cap: _____________________________________________________________________ 4 1) if the two differ by one percent or less the calculated interest rate will become your new (adjusted) interest rate; 2) if the calculated interest rate is more than one percent higher or lower, your new interest rate will be only one percent higher or lower than the existing interest rate; 3) if the calculated interest rate is the same as the existing interest rate, the adjusted interest rate will not change. Year Index + Margin = Calculated New Interest Interest Rate Rate _________________________________________________________________ 1 N/A N/A N/A 10% (initial interest rate) 2 9.5 2.0 ( 9.5 + 2.0 = 11.5) 11% 3 9.0 2.0 ( 9.0 + 2.0 = 11.0) 11% 4 10.5 2.0 (10.5 + 2.0 = 12.5) 12% 5 8.5 2.0 ( 8.5 + 2.0 = 10.5) 11% o The lender and borrower in this example agreed to an initial interest rate of 10 percent for the first year and that the annual adjustments to the interest rate will be calculated using the index plus a margin of two percentage points. o In year two, the calculated interest rate (index plus margin) is 11.5 percent. Because this is more than one percent above the initial interest rate, the new interest rate is 11 percent. o In year three, the index decreases .5 percent from 9.5 to 9 and the calculated interest rate is 11 percent. Therefore, the interest rate remains the same as the previous year. _____________________________________________________________________ 5 o In year four, the index increases 1.5 percent (from 9 to 10.5) and the calculated interest rate is 12.5 percent. However, because of the 1 percent ceiling on interest rate increases, the new interest rate is only 12 percent. o In year five, the index decreases 2 percent (from 10.5 to 8.5). After adding the margin, the calculated interest rate is 10.5 percent. However, since the 1 percent limit is also imposed on interest rate decreases, the new interest rate will return to 11 percent. REPROCESSING The wording of your agreement with the lender will determine the amount, if any, that the interest rate and discount points may change before closing. HUD requires that your loan be reprocessed if there is any increase in the discount points you will pay or an increase of more than one percent in the initial interest rate on your loan. If the lender seeks reprocessing, the lender will ask you to sign a new application. Whether or not you sign is your choice. However, if you refuse to sign you may lose your deposit. Before you sign any loan application or agreement, make certain you understand your rights. If you sign, you would be agreeing to the higher interest rate and/or discount points shown in your new application. If, after reprocessing, you remain eligible for the loan, the conditions of your agreements with the lender and the seller may require you to complete the transaction at the higher interest rate, lose your deposit or pay some form of penalty fee. You should seek professional advice if you do not understand the agreements you are signing. _____________________________________________________________________ 6 WHAT IS THE MOST YOU MAY HAVE TO PAY The chart below shows what your monthly payments to principal and interest would be if your interest rate increases the maximum permitted amount of one percentage point per year. If your loan closes at the interest rate shown on your application, lines 1 through 6 show your payment after the annual adjustments. Beginning with the sixth year, the payments would not increase again because of the five percentage points ceiling on interest rate increases. The chart shows the highest amount of principal and interest you will be required to pay in any year if your loan closes at the interest rate shown in your application and if the interest rate increases at the one percent maximum each year. This highest payment cannot be reached earlier than the sixth year, but could be reached after then if your interest rate does not increase as quickly as permitted. WORST CASE EXAMPLE Loan Amount: Enter mortgage amount from application ________________________________________________________________ Year Interest Rate Monthly Payment for No. (percent) Principal and Interest ________________________________________________________________ 1 2 3 4 5 6 ________________________________________________________________ _____________________________________________________________________ 7 TERMS OF YOUR ADJUSTABLE RATE MORTGAGE Frequency of rate changes: Annually after first adjustment. First adjustment will occur between 12-18 months after first payment date. Maximum interest rate change at one time: One (1) percentage point. Maximum interest rate change over life of loan: Five (5) percentage points from the initial interest rate shown on your mortgage. Index: One Year Treasury Constant Maturities. Index rate for week ending __________ was __________%. Initial mortgage interest rate: Margin: BE CERTAIN THAT YOU UNDERSTAND THIS TRANSACTION. SEEK PROFESSIONAL ADVICE IF YOU ARE UNCERTAIN. ___________________ Signature ___________________ Signature Date ______________ ATTACHMENT IV Suggested Form of Annual Disclosure ARM Notice Mortgagee Name Date Address Telephone No. Mortgagor(s) Name Address Re: Annual Notice of Changes in Interest Rate and Monthly Installment Payments on Your Adjustable Rate Mortgage Dear Mortgagor: On ___ (date) __, the interest rate on your Adjustable Rate Mortgage (ARM) will (increase/decrease) from ____ % to ____ %, and your monthly installment payments will (increase/decrease) from $ ______ to $ _____. Beginning with your __ (date) _____ payment, please pay the new amount. New payment coupons (or monthly billings) reflecting the new amount will be sent shortly. Your present interest rate was based on an Index Value of ____ %. To determine your new interest rate we added the Current Index Value of _______ % as of ___ (date) ______, to the agreed upon Margin of ______ % for a total of ______ % (rounded to the nearest 1/8th percent). The new Existing Interest Rate of _______ % may not be more than one percent higher or lower than the prior Existing Interest Rate of _______ %. The original Interest Rate of your mortgage was _______ % which may not be increased or decreased beyond five percent during the life of the mortgage. The new monthly installment was determined by computing the monthly payment to principal and interest necessary to pay off the principal balance of the mortgage ($_________________) over the remaining term of the mortgage ( __ yrs.) at the new Existing Interest Rate, without taking into account delinquent payments, and crediting any prepayments to principal. The required monthly escrow payment ($ ______ ) was then added to the required principal and interest payment. _____________________________________________________________________ 2 If you have any questions, please call __________ at the telephone number listed above, or you may use the toll-free numbers previously provided. Sincerely, NOTE: If the annual ARM Notice is designed to include all the essential factors for calculation of the new interest rate and monthly payment, a file copy should be sufficient to reflect the computation. ATTACHMENT V INDEX The weekly average yield on United States Treasury Securities adjusted to a constant maturity of one year (published in the Federal Reserve Bulletin). See Attachment II. CURRENT INDEX The most recently available Index published 30 exact days before the Change Date. CHANGE DATE The effective date of an adjustment to the interest rate. (Called the Interest Adjustment Date by GNMA). The date is specified in paragraph 2 of the Adjustable Rate Rider or the Allonge amending the Note. (This is not the date on which monthly payments change.) MARGIN The agreed number of percentage points added to the Current Index to determine the Calculated Interest Rate. The number is specified in paragraph 3(b) of the Adjustable Rate Rider or the Allonge Amending the Note, and remains constant for the life of the mortgage. INITIAL INTEREST The interest rate stated in the note which RATE will be in effect for 12 to 18 months from the date of the first monthly payment. CALCULATED The Current Index plus the Margin, rounded to INTEREST RATE the nearest one-eighth of one percentage point (0.125%). The Calculated Interest Rate is used to determine the Adjusted Interest Rate. ADJUSTED INTEREST The new interest rate effective for the RATE twelve month period following each Change Date. (The Adjusted Interest Rate will become the Existing Interest Rate on the next Change Date.) EXISTING INTEREST The interest rate in effect immediately prior RATE to any adjustment on the current Change Date.