My first two questions were going to be: “What if the property won’t appraise for the amount that they are trying to re-fi? (which is going to be the situation with just about all of these loans) And, what if their income to expense ratios are strained……………………
And then I read the article and here’s what I found”
Quote directly from the article:
“Knowing a loan’s initial rate, the index used as a basis, and the margin above the index, we can use the current index rate to project the monthly payment after full adjustment and compare it with the initial payment. Imagine payments that are initially 30% of borrower income. The adjustable-rate first mortgages are classified into four reset groups:
• Group A – increase 25% or less (to 37.5% or less of income); almost always bearable
• Group B – increase 26% to 50% (to 37.5% to 45% of income); harder to bear
• Group C – increase 51% to 99% (to 45% to 60% of income); likely unsupportable
• Group D – increase 100% or more (to 60% or more of income); clearly unendurable
I will assign reset difficulty probabilities to the four groups as follows:
• Group A – 10% (seldom subject to reset strain pushing towards default)
• Group B – 40% (often subject to reset strain pushing towards default)
• Group C – 70% (mostly subject to reset strain pushing towards default)
• Group D – 100% (always subject to reset strain pushing towards default)
If reset strain occurs and there is insufficient equity to enable a sale or refinance, default is likely.”
