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Hi ilargi,
About Pay Options, mentioned in the article, do you know if they are the same as the Option ARM's in the graph of ARM's I've included? If not, can you tell me what an Option ARM is?
from Aarron Krowne article:
Option ARMs come in four flavours:
Minimum Payment - you contract for some minimum payment for a the first year. Unpaid interest will be added to loan principle and will be payable when the loan resets to a standard payment schedule.
Interest Only - For the initial period you pay only interest and no principle. After reset you pay both interest and principle.
Fully Amortized 30 year schedule - same as a fixed 30 year except the rate floats according to prime
I believe the 4th flavor is a 15 year amortization.
I suspect the no-pay option ARM is cynical humour. If you get a minimum payment option ARM you are basically renting the property from the bank. Default and it takes 6 months to evict and reposses so you live for free.
Note that the Credit Swiss graph is a bit out of date and that some of the mortgages had overiding reset clauses which have the effect of moving the rest point forward in time. This may have the effect of removing the valley which exists between the two peaks on the Credit Swiss graph.
Thanks new account,
Interesting about the reset clauses, I guess filling the gap would ease things to some degree? I wonder what proportion of the first two flavours there are in those option ARMS, they seem to be in the second half, in the main.
Six months to evict, eh? I would have loved that as a student ... take out a strip of mortgages and immediately default as they come into effect, I moved pretty often then anyway:)