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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: russwinter who wrote (46099)11/25/2005 8:34:27 AM
From: Ramsey Su  Read Replies (1) of 110194
 
Russ,

as ild pointed out using ML's rate sheet, the I/O is not the toxic part of the bad loans. It is the other stuff such as the 1% teasers, the 2 yr resets, the 125% LTV loans, the stated incomes etc etc which are going to blow things up here.

When I listened to misc conf calls, analyst after analyst are still asking questions like how many I/O or option payment loans when they should be asking how many loans in their portfolio are due for reset and what would be the average increase in rates/payments.

Finally, let me illustrate with an example. Would you agree that the 1% teaser initial rates are just about the most toxic loans out there? Lets assume this is either an I/O or payment option loan at origination. Now it really doesn't matter whether the teaser period is 1 mon, 3 mon, 6 mon or even a year, a reset is going to happen. The terms of these loans typically include a 2% interest cap. So the payment triples at reset, yes, TRIPLES. Furthermore, it will go into neg amort immediately. Now you tell me which is the toxic part of this loan, the I/O or the teaser/reset? Shouldn't we be asking lenders how many of these loans they have in the books? Would you feel any better if a lender has a ton of these loans but are fully amortized?
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