The shock is going to be the reset date, potentially 5 yrs from origination.>
Maybe bankruptcyenabler can chime in on language and definitions, but my understanding is that the vast majority of ARMs and IOs, have 2% annual payment caps, that kick in after only a year of teaser rate. So if one took a 3.5% prime ARMs teaser in July, 2004, it's being "reset" and "capped" to 5.5% today. Since the real rate is now pushing 6.40% (1 Libor of 4.15% plus 2.25 margin= 6.40%),
libor-loans.com
then the lender gets to eat that one, at least until July, 2006, then the borrower can have his shot at eating it.
The "reset" term you use is the the term I use for this rate change, so want to make sure you (or I?) are using correct terminology. The reversion to regular amortization falls into either 2,3,5 years, and there appears to be some 7's out there. My understanding is that subprime and Alt A most commonly have to use the more toxic 2 and 3 years reversion (if that's the correct term). Of course at that point, people (prime, not subprime) with $60,000 incomes and $400,000 mortgages (plus whatever negative amortization has piled up) will then be regular amortized for the remaining term. At today's 6.4% level, that would be $2,502 a month P&I alone. Of course subprime and Alt A will be paying higher than that. A glance at this chart showing originations suggest two and three year reversion to reg amortization will be coming to towns near you soon enough, with 2006 and 2007 promising to get brutally ugly.
idorfman.com |
