DO YOU SEE A PROBLEM HERE?

I DO! The one on the left is scary. The one on the right is not.


It may be very hard for people to refinance a recently purchased home because even if the appriasal comes close to the purchase price, the loan balance has exceeded the original loan by the amount that was added on as a result of negative amortization from Option-ARM programs.

However, the one on the right paints a different picture for two reasons: first, it is not adding unpaid interest to the loan balance; second, interest-only loans come with 3, 5, 7, & now 10 year periods. The rates are generally fixed for those periods and at this time last year and earlier the rates were at historic lows. Unlike the Option ARMs, they do not adjust monthly.

So when do these loans adjust?
Surprisingly, there is little data that is publicly available on that subject. The best resource is a study conducted in the spring by Fannie Mae, a federally chartered corporation that buys mortgages after lenders have issued them. Fannie Mae looked at 2002-2004 loan data to determine what portion of the existing loan pool would be "adjusted," and when.

Economists are still trying to put numbers on this reset factor, particularly when it comes to the riskiest home loans, referred to as "sub-prime."

"We don't have enough data to know how big a problem this will be," said David Berson, chief economist at Fannie Mae, the nation's largest mortgage packager.
For now, though, the lending party is still going strong.