Industry trade magazine Inside B&C Lending pegs the 2006 dollar volume of new sub-prime loans at $640 billion. According to the Real Estate Charts chart (exhibit 18), 78% of those dollars were in 2-year adjustable loans.
A loan of this variety is often called a 2/28 ("two twenty-eight").
A 2/28 originated in 2006 will reach its first adjustment period sometime in 2008. Adjustments on sub-prime loans are typically 3% at the first adjustment, and 1.5% every six months thereafter until the "cap" of 7% above the original rate is reached.
Looking back to 2003-2006, a homeowner facing an upward adjustment in his mortgage rate could usually just replace the existing home loan with a new one, thereby avoiding the upward adjustment altogether. This is commonly called "refinancing" your home.
At present, though, this is a much more difficult proposition; there are considerably fewer mortgage products available for sub-prime borrowers to use.
With fewer available products into which to change, the homeowner with an adjusting mortgage may have no choice but to swallow the higher rate after the two-year fixed rate period ends.
If your home loan is among the 78% of 2/28s originated in 2006 -- even if you have a pre-payment penalty -- it may be time to call your loan officer just to check out your options.
Paying a little bit extra today on a new loan may be better than paying a lot on an adjusted mortgage tomorrow.
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Wow...did not even think about that. Great FYI. Thanks!!
That might work in some cases.
What I'm seeing are people that are upside down, they owe more than the home is worth on their loans, and they don't have the pre-pay $$.
Some of them got in with low teaser rates. So from the start their payments were artificially low and they were just getting by with those low payments.
Are there any new programs for them now that their payments are going to sky-rocket higher again? I say again because many have already seen their monthly payments go much higher because of higher prop taxes and insurance even before the rate adjustment.
To take it a step further, my advice would be to time the whole refinance to fund right when the PPP ran out. If you qualify for the refi, you can control when you execute it.
I think that this is an excellent business building strategy. Great advise. This is also an opportunity to put a client that may still be credit challenged into an FHA product. Great post.
Very informative post Ilyce! Thanks for the advice.
Ilyce,
May not be good for everyone but your point is excellent! I need to make a contact with my database for everyone of my adjustable rate past clients to see if a refi might be a good idea, pre-payment penalty or not.
Thank you also for your input to my question about video email.
Steve
Nicole - Glad I could put a new spin on things.
Armando - There aren't too many "new" products out there right now (repackaged maybe). The key here is getting back to basics and reintroducing people to FHA financing.
Seth - Thanks for that. I agree.
Kate and Vanessa - Thank you.
Steve - You're right, but it can't hurt to see where things might fit for each of your borrowers. And in contacting them, you might get some referrals, too. P.S. You're welcome.