From 2004, the price of a barrel of oil started to climb along with the rise in the prime rate and the one year ARM: Fully Indexed Rate
and the prime rate.
The guidance specifies that an institution's analysis of a borrower's repayment capacity should include an evaluation of the borrower's ability to repay the debt by its final maturity at the fully indexed rate
, assuming a fully amortizing repayment schedule.
The lender can then recast the loan as a fully amortized adjustable mortgage at the fully indexed rate
By the way, even though the borrower may choose to pay the minimum payment, in 99% of the cases they have to QUALIFY at the Fully Indexed Rate
(the fully amortized 30 yr.
To be sure, it is important to note that option ARMs, unlike IO hybrids, do not qualify borrowers on the basis of the minimum payment, but on the basis of a fully indexed rate
and amortized payment.
She went on to say that the option ARMS that offer a start rate of as little as 1% were equally dangerous because the start rate is, in most cases, only good for one month and goes to the fully indexed rate
, causing negative amortization because the unpaid interest is added to the loan balance.
In addition, CRL recommends: * Lenders should qualify borrowers based on the fully indexed rate
of the loan -- not the teaser rate; * Agencies should pursue meaningful enforcement against lenders and brokers whose underwriting practices harm homeowners; * Federal regulators should require that subprime lenders evaluate the borrower's ability to repay before making a home loan.
GOLDEN WEST FINANCIAL CORPORATION AND SUBSIDIARIES MONTHLY FINANCIAL HIGHLIGHTS December 1999 - December 2000 (Dollars in millions) 2000 DEC NOV OCT SEP Total Assets $ 55,704 $ 54,848 $ 54,284 $ 52,365 Cash and Investments $ 1,112 $ 1,179 $ 1,472 $ 663 Loan balance (Including MBS) $ 52,343 $ 51,370 $ 50,506 $ 49,483 Loans Originated $ 1,648 $ 1,568 $ 1,647 $ 1,650 - Month Fully Indexed Rate
on Loans Originated - Month 8.