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

To: russwinter who wrote (27222)	2/25/2005 1:17:51 PM
From: ild	Respond to of 110194

Good find. I like this excerpt: Q: Why is PIMCO more concerned about the rise in interest-only loans? Simon: We think a lot of the interest-only borrowers are people who are close to being entirely maxed out in terms of spending. These borrowers don’t want lower monthly payments; they need them. We’re afraid that a lot of those people are going to get really squeezed financially when those loans reset upwards. Most of these interest-only loans seem to be coming as adjustables at below-market teaser rates. For two years, borrowers get a below-the-market rate and then the loans will reset upward. They are hoping that they can reset and refinance into a teaser rate again two years from now, but if they can’t, their payments will go up by about 40% in a lot of cases, given present short-term rates. We think those people are in serious trouble because a lot of interest-only borrowers have a very high debt-to-income ratio to begin with, and we are very nervous about them from a credit point of view. This also removes fuel for further real estate increases. What I don't understand is how a borrower can get a teaser rate for 2 years. Unless it's a negative amortisation loan the bank is going to lose $$ for two years.