Title: Designer Mortgages: The Boom in Nontraditional Mortgage Loans May Be a Double-Edged Sword. So Far, Most Banks Have Moved Cautiously
Abstract: What once was the mainstay of mortgage lending--the 30-year, fixed-rate mortgage loan--is now just one of a whole array of lending products that have spurred the availability of mortgage money. mortgage boom's hottest markets now are rife with alternative--and sometimes riskier--products. Even Federal Reserve Chairman Alan Greenspan's attempt to quell momentum with a series of federal funds rate increases hasn't slowed the rush to buy. Mortgage rates continue favorable with one forecaster, Cantor Fitzgerald in New York, stating in August that mortgage rates actually will move even lower before they feel the pressure to head back up. Rather than tell buyers they aren't qualified, lenders have produced an array of innovative alternative financing products--anything to get people into new homes. These include fixed-rate and adjustable rate mortgages with interest-only payments for up to five years, no-money-down loans, piggybacks, and, perhaps most controversial, the option-ARM which gives the borrower increased power over how he can pay off his mortgage. smorgasbord of alternative products isn't limited to riskier items. It also includes lower-down-payment loans with insurance components and portable loans that can be transferred from one property to another. But it's the riskier products that are cause for concern. Bankers and regulators are both asking: What happens in the event of an economic slowdown? After all, the new products are less than five years old--and they remain untested by The future is here, says Mark Vitner, a senior economist at Wachovia Corp., Charlotte. The mortgage business hasn't seen a lot of innovation until recently and it was long overdue. Non-traditional loans have extended the pool of folks who can qualify for mortgage loans and this has led to an increase in home ownership, he affirms. Only time will tell whether they can withstand a recession. Not if, but when A period of readjustment, when it inevitably occurs; could go one of two ways. Fed, with its gradual increases in the federal funds rate, hopes for an orderly end to price inflation or a soft landing. It's also possible that panic could set in as speculators, unable to service their mortgages, dump their properties and real estate values collapse. Another worry is the growing indebtedness of the American public. Outstanding balances on credit cards have risen to more than $800 billion or $7,200 per U.S. household, and that doesn't include an additional $1.3 trillion in non-card debt for cars, appliances and personal loans. Moreover, a new bankruptcy law that takes effect this month will make it harder for consumers to get rid of their debt. It's easy to see why analysts and regulators fear that all of this could undermine the housing market, and mortgage lenders along with it. Americans have taken on some $8.8 trillion in mortgages to buy homes, up an astounding 42% since the 2001 economic slowdown. In addition, borrowing against home equity rose to a record $715 billion in 2004 and is expected to rise more this year. What's more, many, if not most, lenders have weakened their lending standards, meaning that many consumers may carry an even larger debt burden later down the line when they can least afford it. Mortgage lending is inherently cyclical and so most observers know that real estate sales will slow eventually. only questions are When? and How much? Some analysts believe that the slowdown won't come until 2007 or later and that even then we'll experience a manageable, soft landing. Whatever the case, the slowdown is sure to come as interest rates rise, and homeowners with balloon payments will take the hardest hit. Sales of ARMs have doubled in the last two years, according to American Bankers Association figures. The tricky part is that most of these loans are going to sub-prime borrowers and most are two-year ARMs, says James Chessen, the ABA's chief economist. …
Publication Year: 2005
Publication Date: 2005-10-01
Language: en
Type: article
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