September 13, 2008

The Option Pay: Mortgage: The Next Wave

With option pays, borrowers have four separate payment choices every single month. Yes one month you can choose to pay interest and principle and another month partial interest, in case you wanted to live above your means. many did that do you think

The option arm mortgage adjusts frequently, every few months or even every month, based on the London Interbank Rate (LIBOR) plus a little for the lender

Used as a 30/15 Year Fixed
A payment based on a 30 year amortization table, if made every month, will pay off the mortgage, in 30 years of course. You could treat this as a 15 year mortgage as well.

Interest Only Payment
The principal balance remains unchanged after the payment is applied.

Negative Amortization
A partial interest payment where part of the interest is deferred and added to the principal balance. This is negative amortization. Your mortgage balance is actually increasing, not being paid down

Here is a chart from Credit Suisse showing us that the increase from the orignal teaser rates are just in front of us.

Billions in total Pay Option ARMs outstanding, 60% issued in California reseting in 2010 and 2011.

Another Tsunami
This is the second wave of foreclosures and home auctions that the resets trigger beginnig mid to late 2009 into 2010-2011.

If you have one of these and want some reliable info, go to the Federal reserve board and pick up this pamphlet.

The reason why WAMU is on the ropes and why Country Wide failed is because the 2003 - 2004 pay option arm loans are recasting and then going 90 days late. But all you need to know is pay option arm loans have a teaser payment that will last until the loan goes 110%-125% of original value and then the loan recasts to a fully amortizing loan.Im afraid to look...

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Howard Bell
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