Doug Noland in February, 2004 NOT 2005 on Pay-Option ARMs and and IO loans:
February 2 - Dow Jones (Julie Haviv): "With volumes of new mortgages and refinancing shrinking, lenders have been putting more efforts into marketing products such as interest-only mortgages to attract consumers... With an interest-only mortgage, the borrower is allowed to pay only interest payments early in the term of the loan, with payment on principal deferred to later years. That means smaller monthly payments for the homeowner in the first years of a mortgage's life. A couple of years ago, there was little demand for interest-only mortgages, but recently, volumes have picked up dramatically. For example, at internet broker Quicken Loans - which last year originated about $12 billion in mortgages - currently about 40% of new loans are interest only, with most of the growth emerging over the past six months, according to its chief economist, Bob Walters. Two years ago, the lender registered zero interest in the loans. Other brokers report a similar pickup. Wells Fargo, one of the U.S.'s leading mortgage lenders, says interest-only mortgages account for one fifth of new loan applications. 'A few years ago, interest-only loans were mostly targeted to the wealthy and sophisticated,' Quicken's Walters said. 'Today they are being offered to a much wider audience that wants to lower their monthly payment.' And the savings are substantial: Interest-only mortgages are typically variable-rate loans that range from 4.25% for a three-year adjustable to 6% for a 10-year... Homeowners can lower their monthly payment by about 20% to 25% by skipping principal payments in the early years of the mortgage...with the mortgage industry facing a drop of one-third in business volumes this year from last year, when the refinancing boom boosted volumes to record levels, there is clearly pressure on brokers. 'There is no doubt that there are lender abuses going on out there because people are currently being offered mortgages that they otherwise may not qualify for,' said Paul Bennett, certified financial planner and president of Private Wealth Advisers in Virginia, said."
So, Wells Fargo - the originator of $470 billion of mortgage loans last year - is seeing 20% Interest-only mortgage applications these days? Wow, things have really taken a decided turn for the worst over the pasts few months. And consistent with so many Exacting Bubble Ironies - the passing of the historic Refi boom did not, as one could have reasonably presumed, usher in the downfall of the Great Mortgage Finance Bubble - anything but. Rather, I would today strongly argue that the recent surge in Interest-only and no-down-payment lending is the lending industry's aggressive response to assure the continued rapid growth of the mortgage business. It is also a major recent development sure to add fuel the National Mortgage Finance and California Housing Bubbles.
After reading Ms. Haviv's informative article (on the recent popularity of Interest-only mortgages), my first thought was, "What about Countrywide Financial?" They are the most innovative and aggressive, while surely determined to expand and grow market share (above their 2003 originations of $435 billion!). Moreover, they have built an enormous lending and servicing infrastructure. They also have an inflated stock price and ballooning balance sheet to sustain. What have they been up to? (They did not return my phone call requesting information on the extent of their Interest-only lending.)
Probing "current rates" at Countrywide's website proved informative. I first put in a Dallas zip code and checked for a $200,000 purchase mortgage. The quick response was rather standard, with 30 and 15-year fixed mortgage rates, along with one and 5-year adjustable mortgages. Things, however, turned more interesting when I input a $500,000 mortgage with a Southern California zip code. Right there, featured prominently along side traditional fixed and adjustable rates, were rates for "Interest Only - 30-year adjustable, Fixed for Five Years." As for monthly payments on a $500,000 loan, a 30-year fixed mortgage at 6.125% calculated a monthly payment of $3,038. An adjustable-rate mortgage fixed for 5 years at 4.875% produced a payment of $2,646. Meanwhile, the Interest-Only mortgage fixed a 5.0% (4.136% APR) for five years produced an enticing payment of only $2,083. Wow, a half million dollar home for $2,000 a month! But it gets "better."
There is also a drop-down menu that provides 10 additional mortgage options including 10 and 15-year fixed mortgages, as well as Interest Only - Fixed for 30-years. Yet there was another mortgage option that caught my eye: "The Pay Option ARM."
From the website: "This program (Pay Option ARM) combines the low interest rate of an adjustable rate mortgage with added flexibility that can keep your monthly payment affordable if interest rates should rise. You can pay down the loan as quickly as you like, but need only pay the interest for the first 10 or 15 years... Initial payment is based on paying off the loan over 30 years with a low introductory interest rate. After the three-month introductory period, you have the option of maintaining your monthly payment even if this falls below the interest due on the outstanding balance. You may always increase your monthly payment to pay off your balance more quickly, or to at least cover the monthly interest due. The interest rate is reviewed and can adjust monthly. The rate is based on the LIBOR rate plus a margin. The minimum payment is reviewed annually and is limited in the amount that it can increase each year. This is a great product for a consumer who only intends to own the property for a short time, who wants the lowest possible monthly payment in the short term, and who prefers affordability and flexibility in the monthly payment. Pay Option ARM loan product features: Low monthly payment gives you greater control in managing your cash flow and financial assets; Pay down your principal balance at your own pace and reduce future monthly payments; Afford a larger home; Greater flexibility in monthly payments when personal income fluctuates; Combines the low initial rate of an Adjustable Rate Mortgage with stability in the monthly payments should interest rates rise."
With a "low introductory rate" of 1.75%, the monthly payment on the $500,000 mortgage is calculated at only $1,786 (less than many (millions?) are paying for rent throughout the Golden State!). And while the "small print" describes a 20% down payment, a pop up appears with the caption, "Worried about your down payment? Would 100% financing help stop the worry? With our 80/20 Loan programs, you might be able to afford that dream home sooner than you think." "Countrywide is now offering 100% home financing with no income documentation. Our 80/20 Stated Program allows qualified borrowers with excellent credit to get an 80% first mortgage and a 20% Home Equity Line of Credit to equal 100% financing on their home... And with the 80/20 Stated Program, qualified borrowers don't even need to provide W-2's, tax returns, or any documentation of income. Simple. Our 80/20 Stated Program features: 100% financing up to $500,000 (80% 1st up to $400,000 and 20% 2nd up to $100,000). No mortgage insurance (PMI) required. Reduced documentation."
So I think I am beginning to understand... It would appear that purchasers are afforded the opportunity to borrow 100% of the $500,000 mortgage, perhaps with a monthly payment of less than $1,800. "What about closing costs," you ask? Interestingly, The Pay Option Arm even comes with negative points, or a $1,250 Credit. And as is illustrated in detail on the "estimated closing costs' worksheet, this Credit reduces out-of-pocket Total Estimated Closing Costs to a mere $1,185. A deal simply too good to refuse, especially in markets with rapidly inflating prices.
Countrywide has other "hot loan options," including the "FlexSaver Arm" featuring "interest only" "flexible monthly play options" - "loan amounts up to $1,000,000" - "loans up to $400,000 with 5% down." "Interest Only Products" with "loan amounts available up to $2,000,000. And, of course, there's the EasyWay Flex mortgage providing 100% financing up to the GSE's $333,700 limit. What ever happened to the GSE's 70% loan-to-value requirements? At Wells Fargo, the Interest Only mortgage option "increases your cash flow - making homeownership more affordable... Redirect your cash flow to supplement your savings or investment funds, maximize contributions to your 401k or other tax-deferred retirement accounts... It's your money to use as you see fit." |
