This Northern Virginia home is an example how many are still talking about I/O as if it is a bad thing. The only thing bad about an I/O is possibly an indication on how marginally qualified the buyers may be.
Now if this woman bought the house with one of those 1% teasers with a short fuse of 1 yr or less, then it really doesn't matter if the payments are I/O or fully amortized.
This is how I picture the sequence of events unfolding.
Let's look at the last peak, 1989. At that time, the hybrids were unheard off, nor were the subprimes. There were C and D paper lenders, usually charging as much as the Vegas loan sharks. The adjustables typically had the 1% interest cap and 7.5% payment caps. The COFI was the most common index, followed by the 1 yr treasury while the LIBOR were used for C/I properties. Here is a table of the COF index. As you can see, rates actually came down for the adjustables after that peak.
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Now picture yourself the idiot who bought in 1989, the absolute peak. (I am actually one of those but I had good reasons <gggg>) Pertaining to the mortgage payment, it would have either remained the same if you had taken out a fixed rate, or, it went down if you had taken out an adjustable.
Therefore, unless you lose your source of income, you do not have to do a thing. Just hang on indefinitely until time cures your mistakes.
Now picture this woman in Northern Virginia today. If that I/O loan is a fixed rate loan and she truly qualified for this loan using income from her two jobs, nothing bad is going to happen to her unless she loses the income from the jobs.
Unfortunately, many are not in that position, probably including this North Virginia woman. I have ran through each scenario and there is not a single outcome that is positive for anyone who extended themselves beyond a fixed rate loan qualified via sound underwriting guidelines.
For those who are facing a reset today, I estimate the minimum increase to be 1% in interest and around 15% increase in monthly payments. A refinance would be necessary for this scenario to happen. Furthermore, this borrower must not be taking out a higher mortgage to pay for closing costs and/or back payments since a higher balance would result in a higher payment.
For those who cannot refinance, then they would be looking at a 2 or 3% reset and 40+% jump in mortgage payments.
This is the big difference between then and now. Hanging on with no change in payments are only available to those who had locked in a FRM. I should go down to the mall tomorrow and see how many are running up their credit cards backed by savings or backed by MacMansion ATMs. |
