Thursday, March 22, 2007

FED Loan preview

Here's another installment of 10-k peak into mortgage lenders.

This peek is for FED

Interest Rates, Terms and Fees. We originate residential adjustable mortgage loans ("AMLs") with 30 and 40 year terms and interest rates which adjust monthly based upon various indices.. . .

Loans with 40-year terms were 80%, 77%, and 27% of loan originations during 2006, 2005, and 2004, respectively. The increase in loans with 40-year terms is attributable to increased marketing efforts for this product as a response to the decreased "affordability" of houses in our market areas.

Payment Caps. There are varying periods for which our loan payments may be fixed, ranging from one year to five years. If the payment is fixed for one year, after the first year the payment may be increased by no more than 7.5% each year. If the payment is fixed for three years, after the third year the payments for the fourth and fifth years may be increased by no more than 7.5% for each year. If the payment is fixed for five years, after the fifth year, the payment will be adjusted to provide for full amortization, starting with the sixth year. An annual payment cap of 7.5% applies thereafter, subject to the lifetime balance cap described below. Most of our loans, including loans with fixed payment periods of less than or equal to five years, will have payments adjusted ("recast") every five years without regard to the 7.5% limitation to provide for full amortization over the balance of the loan term. The annual payment cap of 7.5% applies thereafter. The portfolio of single family loans with a one-year fixed payment was $4.6 billion at both December 31, 2006 and December 31, 2005 and was $2.9 billion at December 31, 2004. The portfolio of single family loans with three-to-five year fixed payments was $1.8 billion at December 31, 2006, compared to $2.7 billion at December 31, 2005, and $1.6 million at December 31, 2004.

(Click to make larger).

The following table shows the contractual maturities of our loan portfolio at December 31, 2006:

Here are my takeaways--

Interest rate variability: A monthly calculation and application has to be a nightmare.

Payment Caps: This is so special. The payment will cap at no more than 7.5% (so if you have a $1,000 payment it will now go up to $1075--whoop dee do), but the interest that accrues is variable every single month. Further, even though there are payment caps in place, for most loans in the 5th year the entire thing gets reset so that the payment is set so that it will re-amortize over the remaining life of the loan. If you have a 40 year mortgage, I guess that is 35 years, and you are likely to owe more than your home is worth. HOW CAN THE AVERAGE HOMEOWNER UNDERSTAND THIS CRAP?!

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