“Nontraditional” mortgages more popular than ever
By Justin Hunter
The slowing housing
market has had a prominent impact on the mortgage
industry. Mortgage originations are down across the
board, even though interest rates have been declining
since the beginning of July.
The biggest result of the slowing housing market has
been the emergence of “nontraditional” mortgages.
Potential borrowers are less able to afford the high
housing costs so they are resorting to mortgages that
allow for low, if any, down payments
along with lower than normal monthly payments.
The article, “‘Nontraditional’ mortgages
rise as overall origination falls” posted on the
October 24, 2006 edition of Inman News, describes how
first-mortgages or “traditional” mortgages
have been steadily declining throughout the year.
“First-mortgage origination volume decreased 16
percent in the first half of 2006, while strong demand
continued for interest-only and payment-option mortgages,
or so-called ‘nontraditional’ mortgages,
according to a survey from the Mortgage Bankers Association
(MBA) trade group.”
Interest-only and payment option loans are the most
popular nontraditional loans available. Both are risky
and are not as beneficial as first-mortgages, for the
borrower in the long run, but they allow a borrower
with initial insufficient funds to finance a home.
And as the market worsens, less people have the necessary
funds to obtain a first-mortgage.
“‘In the context of a decelerating housing
market and a slowing of overall mortgage originations
activity, consumers continued to choose IOs (interest-only)
and payment-option loans in the first half of 2006,’
said Doug Duncan, chief economist and senior vice president
of research and business development for the Mortgage
Bankers Association, which produced the survey.”
The increasing originations of nontraditional loans
are causing concern for economists in the industry,
due to the likelihood that many of the borrowers will
default in payments once their payments adjust after
the interest-only or fixed-rate period.
“The Office of the Comptroller and other federal
bank regulators issued new guidelines on Sept. 29 directing
banks to tighten underwriting and disclosure standards
for nontraditional mortgages.”
These guidelines instruct banks to use the fully indexed
rate when analyzing a borrower's risk ability to repay
interest-only mortgages and payment-option loans.
The survey produced a detailed report of these nontraditional
mortgages: “Interest-only loans accounted for
26 percent of originations in the first half of 2006.
However, the composition of interest-only originations
changed, with fixed-rate interest-only loans accounting
for 24 percent of all interest-only loans in the first
half of 2006 compared with 13 percent in the second
half of 2005. Payment-option mortgages ("option
ARMs") accounted for 15 percent of the dollar volume
of originations in the first half of 2006, up from 8
percent in the second half of 2005.”
These nontraditional loans
are becoming more popular every month, with the looming
perspective of defaults in the near future. Stricter
underwriting guidelines may slow the growth of these
mortgages but they are still the most feasible option
in this slowing market.
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