I just got back from the nearby CFC office. The young gals who staff it are smart and capable enough, but when you really delve into the particulars of how pay option ARMs work, they give poor answers, plus alot of irrelevant ones( but the property goes up, your payment only goes up 7.5%, blah, blah). I came away confused, and I'm highly sophisticated, can't imagine what those less so are thinking.
At I one point however, one of the young women said that her manager is now discouraging option ARMs "unless the customer insists on them". They are clearly being indoctrinated from higher ups on how they are supposed to be used, so a butt covering program is underway at CFC, a quasi-tightening via marketing? Perhaps also in response to the letters, and comments coming from the regulators?
I read over the disclosure form, and bottom line is yes, if borrowers want to make minimum payments, they can negative amortized the difference until the amortization hits 115%. At today's APR of 6.0-6.5%, and because they require 5% down, that threshold will get hit in about three years per my math. These are in effect 3/27 neg amort IOs at current interest rates.
CFC is pushing the monthly treasury average (MTA), which comes with a 3.25% margin (my contact at CFC indicated this is going up now on all their loans, so they are attempting to protect their margins)to qualified borrowers. This adjusts monthly. This is a lagging and lethal looking index, that averages the last twelve months of one year Treasuries (1CMT)and divides by 12. Here it is currently:
nfsn.com
The lethality is easy to visualize, watch those lagged twelve month old rates drop off to be replaced with much higher current rates:
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