Ok, here’s my reasoning. BTW, remember I didn’t come up with the term “neutron mortgage” – the home is left standing but the buyers are gone.
Buyers qualified at 0% down, 33% – 48% DTI in 2003 – 2005. So they’re spending 33% – 48% of their income on their principal and interest plus more on taxes and insurance. Traditional is 28% for all 4 of those items. They’re already squeezed before the first mortgage payment. Loan resets. Now what? Come up with 50% more in mortgage payments, when you’re already at 33% – 48% DTI? You think about refinancing, but you’ve got some problems that no lender will touch: 1) negative equity, and 2) your income qualified for a loan at the teaser rate you got in 04 or 05, but not at today’s higher rates, 3) you don’t have the equity to pay for the closing costs nor the $10K to pay the prepayment penalty to get out early from under the neutron mortgage. Borrower is f*cked, basically.
So the question we have to ask is this: what is the likelihood that someone who got a 100% loan in 2004 or 2005 at 33% or greater DTI can handle a 50% – 100% jump in payments, or refinance out of the mess? I’d be surprised if more than a few could do so.
