They understand that the teaser rate of an adjustable-rate mortgage is exactly that, a teaser.
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They had a good payment history for the first two years or three years under the teaser rate.
Also, the low teaser rate on a subprime loan allows the buyer to borrow more, helping to boost sales prices and commissions.
Borrowers bought houses they couldn't remotely afford using exploding ARMs--a 2% teaser rate could jump to 8% within two years, even if market interest rates didn't change.
When the teaser-rate period ends, the payments soar, often causing "severe payment shock, " the OCC says.
The plan allows those borrowers who took out subprime mortgages between Jan. 1, 2005, and July 31, 2007, to pursue one of the following options: refinance to a new mortgage, switch to loan insured by the FHA, or freeze their "teaser" rate for five years.
Nearly 2 million households will risk default when the "teaser" rates on their adjustable rate mortgages expire within the next year.
But a huge of recent loans are adjustable-rate mortgages because of those teaser rates.
On Thursday Bush unveiled his plan to freeze "teaser rates" on some adjustable-rate mortgages, to keep 1.2 million borrowers away from foreclosure if they aren't able to make their loan payments once the introductory rate expires.
In the Sun Belt, a surge in population in recent years drove up housing prices, which fell dramatically when the housing market slowed--leaving subprime borrowers in the lurch when they try to refinance before the "teaser rates" expire on their adjustable-rate mortgages.
The most widespread problem is mortgages that had special introductory or "teaser" rates that made them more attractive than traditional fixed-rate loans in the first place.
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