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

To: John Vosilla who wrote (26863)	2/21/2005 4:16:48 PM
From: russwinter	Respond to of 110194

Although these are definitely out there, I don't know how popular these will be even among the worst of the silly season crowd? They are very, very toxic after just a few years. The payment can (and will) increase 7.5% a year, and deferred interest is capped at 110 or 115% (CFC) of the loan amount. Since they've been around a year to year and a half, there is a cohort that is getting increasingly toxic already, and as these ripen, that's when this type of lending could end or abate. If you have a $500k mortgage with the 1.25% "introductory rate", your payment would have been $1,666 in say July, 2003. Next July it goes to $1,924, plus you have about $5k a year in negative amortization built up. And it will escalate at $5k a year more for every 100 bps rate increase. You could hit the wall in just a few more years even if rates "mormalize". And here's the killer, and wake up call, and presume well before the five years when combined with a stagnant or weak housing market. The first is that every 5 or 10 years the payment must be "recast" to be fully amortizing. It is raised to the amount that will pay off the loan within the remaining term at the current interest rate – regardless of how large an increase in payment is required. mtgprofessor.com