The 10 Year IO Revisited Again
The 10 Year IO – should investors be scared?
The answer is still NO and we have data and lots of examples (pages 9-16) to back up our claim.
The expiration of a 10 Year Interest Only period definitely has a negative impact on the rate of loans going delinquent. As the borrower’s payment at IO expiration generally rises anywhere from 15% up to a whopping 290%, there is inevitably a negative effect on performance. Fortunately, the data shows that the negative impact to deal performance is quite minor.
Why is the impact so minor? It is all about the quality of the loans and the properties that are current after reaching month 120.
Outstanding Borrowers: Of the current loans that had reached month 120 and still had a 10-year interest only feature (therefore not modified), an amazing 90% of these loans had lifetime near perfect payment histories.
Equity: 74% of the loans had equity in the property.
Many borrowers had been qualified for this higher fully amortizing payment or had already shown the ability to pay this higher payment. These loans were generally originated back in 2005-2007. Starting interest rates were from 5.5 to 8.0% and the initial interest only payment was much higher than today. Low interest rates provided many of these adjustable rate borrowers with low payments during the past 5-7 years. However, the payment history shows evidence that these borrowers were once able to afford the higher payment. Many of the new fully amortizing payments are approximately the same as the payment the borrower was once qualified for at origination. Borrowers will not be happy with the new higher payment, but evidence shows that the higher payment may actually be affordable (see pages 9-11).
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