The pay option loan is a variation on the ARM in which the borrower can choose how much they can pay toward their mortgage each month. The loans allow you as the borrower to pay less each month if the going gets tough. Fair enough.
Trouble is, if you pay the minimum enough times, you’ll come up short of the interest owed, the remainder of which gets added to your principal. Enough of that… and you’ve got a noticeably larger mortgage than you first signed up for… with the adjustable rates about to kick in. Fun, eh?
Yeah.
Countrywide filed an SEC report on Friday admitting they hold $29 billion worth of POLs… $26 billion of which have already grown beyond the amount of the original loan. More than eight out of 10 of these loans were made to borrowers who provided little to no income documentation. As of December, seven out of 10 of them were electing to pay less than interest-only payments.
Good grief… three guesses as to what happens next.
2 comments:
Credit risk is this crisis all about. Nobody can trust anyone else. Nobody want to risk their capital. Nothing is moving. Fancy terms just blow up one after another. Fed is talking about reducing the principle of mortgages. Did they forget about moral hazard? The fundamental problem is that the whole country is over stretched, the government, the people, most of them anyways. It would take time for this to play out. Until then, I dare not to be too bullish. What is your take on the driving force of this action?
I will wait for the cut of Jan Low.:)
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