"Forty-Year Mortgages Flash Onto Issuer Radars"..Yikes ! .... ..
January 14, 2005
Mortgage lenders are considering offering home buyers 40-year mortgages and rating agency analysts think these could wind up in securitizations soon.
Lenders are churning out ideas to sustain the record-level volume in home issuance last year and the 40-year loan idea could present an alternative to the controversial interest-only loans because they do not subject borrowers to potential payment shocks. Option One Mortgage, New Century Capital and Ameriquest are among lenders likely to offer these 40-year loan programs, according to industry officials. Calls to officials at these firms were not returned by press time.
Tom Warack, managing director in the RMBS group at Standard & Poor's in New York, said he has fielded at least six inquiries from originators in the last few months about issuing and securitizing 40-year loans. Similarly, Wen Hsu, associate director in the RMBS group at Fitch Ratings in New York, said she has had informal conversations with originators about them. Lenders are gauging investor appetite for these loans. "We look at it from the originator. What are the underwriting standards and controls they have for these loans?" noted one fund manager who invests in RMBS. Some lenders who peddle IO loans, for example, require higher credit scores from borrowers (SN, 12/27).
Some analysts have already projected that home equity issuance will slow down by 20% this year (SN, 12/27) and many aggressive lenders are working on keeping the production engine going, noted Warack. With home prices and interest rates climbing, some originators believe that 40-year loans could offer borrowers lower monthly payments and could entice them to keep on borrowing, said Carlos Maymi, senior analyst at the RMBS group at Moody's in New York.
The rating agencies are currently evaluating the risks of these loans. Hsu said it is difficult because they don't have a historical track record. "The loss severity of default could be higher because it may take time for borrowers to build up equity in these loans," Warack said, adding that S&P may have to require more credit enhancement for these types of programs.
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