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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: loantech who wrote (26543)	2/17/2005 8:05:59 AM
From: russwinter	Respond to of 110194

I'm blown away by these Pay Option ARMs. At the CFC web site they are now offering one with a 1% introductory rate, with 1.5 points. It says, after the one month introductory period, you have the option to maintain the minimum monthly payment for the first year even if it falls below the interest due on the outstanding balances. The interest rate is adjusted monthly based on the Libor plus a margin. In keeping with the predatory practices on this, there is no further disclosure about how much the payment is recalculated after the first year. Do you have any idea what that would be? I assume they are using the one month Libor, would the margin likely be the 1.875%, or higher? Just to illustrate how leveraged these are, I calculated the effect of one taken out in Calf. last year, using Noland's example. Message 21055223 Taking a $500k loan with zero down, Joe Bully borrows 400k at the 1.75% "intro" rate, and his monthly is set at $1,429. He takes a 100k HELOC at 4%, IO is $333 a month, so the total is $1,762 mo. Today his adjusted Libor and margin is about 4.5%, but at least for the first year his payment is the same. Now? At the current rate interest this is $1,800 a month, so he negative amortizes $371 a month. Of course his house "value" is now up 20% from a year ago, so what's five grand a year in neg amortization? In fact he can borrow the $95k "gain" out with another HELOC if he chooses. The payment on the old HELOC, based on the new 5.5% rate has increased to $458 from $333, so his monthly is now (depending on how much they adjust for after first year) still only $1,887, up from $1,762.