Who said there was no free lunch? You get to make a 1% teaser payment for 6 years and then have your balance reduced, and convert to a 4.5% 40 yr fixed IO.[/quote]
Please tell us where we can read about this deal.
The example given in most accounts was of a 6-year interest-only, with no statement about what was to happen after 6 years.
“One borrower, Danny Annan, an Orange County, Calif., engineer, just finished weighing one of Wells Fargo’s loan modifications. The bank offered to reduce his loan balance by $100,000 and transfer the remaining balance to a six-year interest-only loan with an initial interest rate of about 4.9%, Annan said. The offer will still leave Annan more than $100,000 under water on his home.”
The use of the phrase “initial interest rate” generates the need for follow-up investigation.
Several observations.
Accounts are imprecise whether what is being offered is a loan modification or a refinance into a new loan. If the latter, non-recourse purchase loans may be converted into recourse loans, with dire consequences down the road.
There is probably no principal reduction involved. The balance reduction is probably in the amount of interest not paid by the borrower during the negative amortization period. Wells Fargo reportedly acquired these loans from Wachovia at a 20.4 percent discount from book value, which my arithmetic says may be a good approximation of the percentage of balances attributable to negative amortization (income claimed even though not received).
From the information available so far, there is nothing about this plan that should be appealing to a borrower (from a financial point of view).
