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Originally Posted by GPK
Help me out with this one. What part is all those loans where the first 5 years were interest only that people were getting playing in this? Knew some people that went that route and all I could do was shake my head at the time.
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It plays a part but a.r.m resets arent as big of a deal as people thought it would be because most are based on LIBOR and that hasnt adjusted terribly. Libor is the index most arms switched to back in the early part of the decade. When an A.R.M (adjustable rate mortgage) "adjusts", its based on an index plus a margin. Most arms used Libor as an index and used a margin of 2.25%. So, fully indexed, the new rate is only 5.25% if it were adjsusting today. Thats not a bad rate and people can still "hang on" with the adjustment. The people that are having the problems are ones who qualified based on the interest only payment at 4%. Those people shouldnt have been buying in the first place. Again, it was systemic. Wall St. created these products, loan officers/brokers sold the product and many a customer (some knowing the risk and some NOT) bit off on the chance to buy into a real estate market that was returning up to 50% yearly.
The lowest rates for arms were between 2003-05. Five year arms are adjusting this year and seven year arms from 03 in 2010. The 2003 vintage probably have equity built in. The 2005 vintage will present yet another shoe dropping as that was the top of the market and there is no equity to refinance. Hopefully, the market will stabilize by then.
Most of the REALLY toxic stuff is already on the table meaning already in foreclosure or already foreclosed upon. I mean the subprime when i say that. The rest of the subprime will be DONE by spring of 2009 as most were done in 2 year arms and spring of 2007 was the end of those products.
Speculators are pretty much done and the rush will subside with them in the coming months as it already has been.
Interest only loans are NOT bad loans...for the right people. This is NOT a new instrument. They have been around for years but only used by the rich in the past. What people dont talk about and get lumped in with interest only are the Option Arms which are negatively amortizing. Many of those come do in the next year.
Option Arms are going to present a real challenge IF rates start to go up in the next two years.