Borrowers may face a
payment shock if they cannot refinance the balloon amount (due to a BMW Bank default), or sell the car for the balloon amount (due to a downturn in the used-car market).
The final requirement enables borrowers to benefit from the reduction in early-year payments by using an adjustable-rate mortgage (ARM) without the risk of a large
payment shock at rate resets.
Were pleased to see that only 10% of those consumers we had considered at elevated risk of
payment shock from a rate increase exhibited delinquency over the study period.
However, a downturn in the economy, loan modifications, service transfers, loss of the deferral status and other less-than-ideal scenarios can lead to
payment shock for the borrower and potential losses for the lender.
For most borrowers, monthly payments will change from interest-only to amortizing, which may pose interest rate risk from concentrated resets and rising market rates,
payment shock from additional principal payments, and refinancing difficulties because of lower property values and conservative lending underwriting standards.
These borrowers are potentially susceptible to
payment shock, the firm said, since many of them may not be prepared for the sometimes 60% increase in payment amounts once the pay-down period starts.
With the bulge of HELOCs hitting a potential
payment shock in about a
But while tracker mortgages may be a bargain now, homeowners could face a
payment shock when rates go up again - as they inevitably will.
The value of this shock is not yet known when the interbank market is open; hence, a bank's demand for reserves in this market is affected by the distribution of the
payment shock and not the realization.
The group added that any
payment shock was also generally more than outweighed by increases in earning.
This resulted in borrowers facing
payment shock when their mortgage payments were increased substantially and they could no longer afford the payments.
The agencies are concemed that borrowers may not fully understand the risks and consequences of obtaining products that can cause
payment shock, particularly adjustable rate mortgages.
