We are new to ARMs and have only originated a few so far. We already have a customer that has had a financial emergency and is requesting a one month payment extension on a 7/1 ARM. Must we also extend the maturity by one month? Or will the loan be re-amortized at recast and so no need to extend the maturity to prevent a balloon for the final payment?

Depends on your deferral and loan agreement.

rlcarey, I always appreciate your help. In this case, I am completely out of my element. Could you elaborate a bit? Would I be looking for terms in the loan agreement that outline if, when and how we allow deferrals of payments? And by deferral agreement, do you mean any internal agreement we have to use to execute the deferral between us and the customer? What should I be on the lookout for? Thanks

I really doubt that your loan agreement actually addresses deferrals. So that leaves you with the deferral agreement itself. Since you are modifying the loan obligation of the borrower, it should be supported by a legal modification to the underlying contract. That said, you most likely need to be having this discussion with your legal counsel to ensure that whatever you are using supports both how you plan to handle the loan from a servicing perspective and complies with any State law issues. Whether the deferral will result in an extension of maturity or will be made up at the next recast of the loan after consultation with your legal counsel should be addressed in your modification agreement.

Thanks very much, rlcarey, for your help!

Although the note may not provide a direct answer, it probably does address the more common case where the loan is off the projected amortization schedule due to lump sum curtailments and other voluntary accelerations of principal repayment. Maybe it's possible to apply this language to the case at hand.