The math seems to add up. It says that the average teaser rate was about 1.5%. The typical accrual rate on the loan is MTA + margin. MTA is about 0.5%. Margin is about 300 basis points = 3%. So the actual accrual rate is about 3.5%. In this scenario, paying the minimum 1.5% each month would put you into a positive amortization situation.
I’m not sure how they calculated a payment shock of just 20-25%. If you were paying 1.5% on a 30 year loan, then after 5 years your loan got recast and you had to pay 3.5% on a 25 year loan, then your monthly payment would go up by 45%.
Also, the article says that 80% of option arms were low or no-doc loans. But it concludes that since over 17% of option arm’s are already in foreclosure, the “bad apples” are mostly gone and what’s left are borrowers who didn’t lie about their incomes. And since option arms generally require a max DTI of 28%, these borrowers should be able to absorb the payment shock.
I don’t know how he came to the conclusion that a 17% foreclosure rate before the big recast wave is a sign that things will be better when the wave hits. That’s a bit bizzare.
