Dollars and Jens
Wednesday, April 07, 2004
credit risk
An article on mortgage lending finds me in a sarcastic mood.
With "Low Doc" loans, a borrower may choose not to supply income-tax returns in exchange for a slightly higher rate. That allows a self-employed person with an erratic income to borrow.
How many kinds of "self-employed" people can you think of that don't have income tax returns, and with how many would you trust a house-sized loan? ("But he offered to pay the closing costs in cash...")

When the industry ceases to believe in adverse selection we're in dangerous territory.
Although it becomes more expensive for banks to borrow money when rates rise, ARM borrowers start paying more interest
Unless they don't.
At the current rate of 5.5% on a conventional 30-year fixed-rate mortgage, a homeowner will pay $567 a month for each $100,000 borrowed; an interest-only 4% adjustable-rate mortgage (ARM) costs just $333 a month, figures IndyMac Bancorp Inc. in Pasadena, Calif.


However, if rates rise by just 2 percentage points, the $333 monthly cost on that $100,000 loan could nearly double when the interest-only period ends, leaving some homeowners unable to make their payments.

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