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Posted by Jeff Strickland on June 3, 2005, 4:20 pm
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The mortgage lenders have also studied how long most people keep a mortgage,
and they found that the vast majority of home mortgages are rewritten after
about 7 years. If this is true, then why would anybody take a 30-year
mortgage when if they are going to refi anyway, they can take a 5-year
mortgage and get a substatnially lower interest rate.
Borrowers only NEED for the market to remain flat to avoid problems down the
road.
> By RUTH SIMON
> The Wall Street Journal
>
> 5/18/05
> In the latest sign of how frothy the housing market has become, new data
> show the degree to which people are stretching to buy homes in a hot
> housing market.
>
> The data, from the Mortgage Bankers Association, show that adjustable-rate
> and interest-only mortgages accounted for nearly two-thirds of mortgage
> originations in the second half of last year. Both types of loans have
> helped fuel the strong housing market since they carry lower initial
> monthly payments than do fixed-rate loans, enabling borrowers to purchase
> more-expensive homes.
>
> With such loans accounting for an increasing portion of consumer
> borrowing, some mortgage analysts worry that the growth of these loans
> could cause problems for the housing market and broader economy. "The
> situation with interest-only ARMs is just one of several very scary things
> going on in the mortgage industry," says Stu Feldstein, president of SMR
> Research Corp., a market-research firm in Hackettstown, N.J. The rise of
> interest-only loans, combined with other factors such as higher debt
> levels and changing bankruptcy laws, are likely to cause foreclosures to
> rise, he says, "possibly dramatically."
>
> Though it has been clear that borrowers in high-priced markets have been
> gravitating to products that make homes more affordable, the shift has
> been greater than expected. In California, where home-price growth has
> been sizzling, interest-only loans accounted for 61% of the mortgages
> taken out to buy homes in the first two months of this year, up from 47.1%
> in 2004 and less than 2% in 2002, according to an analysis prepared for
> The Wall Street Journal by San Francisco researchers LoanPerformance, a
> unit of First American Corp. Just 18% of California households can afford
> to buy a median-price house using a conventional 30-year fixed-rate
> mortgage, according to a report issued this month by the California
> Association of Realtors.
>
> In another report issued this month, mortgage strategists at UBS AG called
> the shift to ARMs and nontraditional mortgage products such as
> interest-only loans "symptomatic of...the end of the housing cycle. The
> thing that all of these loans have in common is that they allow homeowners
> to buy a more expensive home than they could have qualified for with a
> 'traditional' loan."
>
> The Mortgage Bankers Association conducted the survey of the interest-only
> and ARM share of mortgage originations in an effort to provide more
> accurate information about the housing market. The group's survey found
> that interest-only mortgages accounted for 17% of loans originated in the
> second half of 2004. And 46% of loans were adjustable-rate loans that
> don't carry an interest-only feature. The data reflect dollars lent, not
> the number of mortgages.
>
> This is the first time the group has measured the share of interest-only
> loans, in which borrowers lower their monthly outlay by paying interest
> and no principal in the loan's early years. It also is the first time it
> has looked at loans actually granted, not merely applications.
>
> The findings are the latest evidence that borrowers have moved decisively
> away from traditional 30-year fixed-rate mortgages and have embraced ARMs
> and, in particular, interest-only loans, which used to be a niche product.
> Though borrowers take out these loans for many reasons, the shifts come at
> a time when both home prices and competition among mortgage lenders has
> climbed. The MBA's weekly surveys -- which look only at application
> volume, not loans that are actually made -- had put the share of ARMs,
> including interest-only loans, at roughly 40% to 50% this year. That is up
> from as little as 18% of application volume in early 2003.
>
> The surge in ARMs and interest-only loans is particularly notable because
> rates on 30-year fixed-rate mortgages remain below 6%, still low by
> historical standards. Borrowers typically turn to ARMs as interest rates
> climb, but so far the increase in rates has been modest. Many economists
> see the current popularity of ARMs and interest-only loans as the latest
> sign of how borrowers are stretching to buy homes they couldn't otherwise
> afford -- and of how lenders are more than willing to accommodate them.
>
> Partly because of these products, mortgage originations are expected to
> total nearly $2.5 trillion this year, according to the MBA, down slightly
> from $2.6 trillion in 2004.
>
> Products such as interest-only mortgages can be riskier than fixed-rate
> mortgages, particularly when interest rates are rising. If home prices
> fall as rates rise, some borrowers with interest-only loans could wind up
> owing more than the value of their home. Even if the growth in home prices
> simply flattens or slows, some borrowers could be squeezed by rising
> mortgage payments.
>
> In another sign that worries about lending practices are increasing,
> federal banking regulators yesterday issued new guidance for lenders
> making home-equity loans and lines of credit. The guidelines require banks
> to do a more in-depth analysis of borrowers' income and debt levels and
> their ability to repay the loan -- instead of relying simply on credit
> scores.
>
> Initially aimed at sophisticated borrowers who wanted to free up cash for
> other purposes, such as investing in the stock market, interest-only loans
> have come to dominate some segments of the mortgage market. A report
> issued in January by UBS found that the interest-only share of jumbo
> loans -- currently, loans exceeding $359,650 -- had tripled since the end
> of 2003.
>
> Michael Menatian, a mortgage banker in West Hartford, Conn., says he is
> seeing some borrowers opt for interest-only loans over mortgages that
> carry a lower interest rate but result in a higher monthly payment.
>
> If home prices continue to surge, affordability could this year reach its
> worst-ever levels in hot markets such as Los Angeles, Boston and Miami,
> according to recent report by Goldman Sachs Group Inc. senior economist
> Jan Hatzius.
>
> The MBA survey highlights other changes in the mortgage market that may
> increase risks to borrowers and lenders. More than half of the
> adjustable-rate loans were "traditional" ARMs, meaning the initial
> interest rate is fixed for less than three years. Borrowers who opt for
> these loans typically get a lower initial interest rate in exchange for
> giving up protection from future rate increases.
>
> Until recently, so-called hybrid ARMs had been a more popular choice.
> These loans typically carry a higher initial interest rate, but are
> considered a more-conservative option because the interest rate is fixed
> for the first three, five, seven or 10 years. That makes it more likely
> that the borrowers will move or see their incomes increase before they
> face higher payments.
>
> The shift to short-term ARMs has occurred even as the difference between
> rates on ARMs and fixed-rate loans has narrowed, reducing the
> attractiveness of adjustables. "To have a lower initial monthly payment,
> people have gone for shorter-term ARMs," says Fannie Mae Chief Economist
> David Berson.
>
> As the use of more novel lending programs becomes commonplace, some
> mortgage analysts worry that borrowers are adding to the risks by
> combining a number of features -- using, for instance, 100% financing and
> an interest-only mortgage or a no- or low-documentation loan to buy a
> property for investment. "These things layer on each other," says Mark
> Milner, senior vice president and chief risk officer of PMI Mortgage
> Insurance Co., a unit of PMI Group Inc. During the past year, PMI has
> increased its charges for insuring riskier loans, Mr. Milner says.
>
>
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