March 16, 2006
Borrowers, Lenders Prepare For Payments To ‘Vault’
thehousingbubbleblog.com
The Wall Street Journal reports on a Fed borrowing study. “A new study by Federal Reserve Board economists found that about 35% of people with adjustable-rate mortgages didn’t know how much the rate could increase at one time, and 41% weren’t sure of the maximum rate they could face. About 28% didn’t know which index of interest rates would be used to determine their adjustments; many others gave incorrect answers, such as the consumer price index or ‘the going rate.’”
“What they’re told [by loan officers and brokers] is, ‘Don’t worry about it because you can refinance before the adjustment hits,’ Stella Adams says. ‘Consumers think that if the broker says I can afford this, [then] I can afford this.’ Another problem is that borrowers often choose their loans largely based on the initial monthly payments rather than carefully studying which loan would be in their best long-term interests.”
From the Mercury News. “Lenders are growing wary of the riskier yet more flexible mortgages favored in Silicon Valley, even as rising interest rates are making it tougher for buyers to afford the region’s high-priced homes. Behind the scenes, lenders, regulators and investors are making changes that could make it harder for borrowers to stretch into homes or refinance existing mortgages.”
“Industry experts are beginning to see additional changes that could affect borrowers who want to buy homes or refinance. Some lenders are less willing to let customers take out loans bigger than their incomes typically would justify. Some are shaving their predictions of how quickly rising home prices will provide equity that can cushion homeowners and lenders alike. There’s more wariness of stated-income loans, also known as ‘liars’ loans’.
“Also falling out of favor are so-called piggyback loans that add a second loan for buyers who need to borrow the down payment, said Anthony Hsieh. Some lenders now require borrowers to pay off or refinance the balance of the second loan within two years.”
“Meanwhile, Wall Street agencies that grade the risk of mortgages sold to investors have made it more expensive for lenders to sell bundles of exotic loans to investors. Some smaller sub-prime lenders, who cater to borrowers with sketchier finances, are charging higher interest rates to compensate, said Grant Bailey, a director for Fitch Ratings.”
“Radio ads increasingly are playing off the fear of rising rates rather than the temptation of low monthly payments with an interest-only loan, said Robert Kleinhenz, deputy chief economist for CAR. Wells Fargo says it’s getting a stream of calls from skittish homeowners holding these unconventional mortgages who want to refinance before their monthly payments vault.”
“And then there are home buyers who feel buffeted by rising interest rates and the risks of exotic loans. Twenty-four-year-old Catherine Gutierrez is two weeks from closing a deal for a new $305,000 condominium. It boasts granite countertops, stainless steel fixtures and cherry-stained cabinets. ‘It looks sleek, it looks clean, and it’s so what I am,’ Gutierrez said.”
“But Gutierrez was uncomfortable when one mortgage broker first steered her toward piggyback loans, then recommended a payment-option plan that would cause her loan to grow whenever she elected to pay only a portion of the monthly interest. ‘He was saying the property will appreciate more than what would be added on top’ of the original principal, Gutierrez said. ‘I just didn’t want to take that risk and put that much faith in the market.’”
“Instead, Gutierrez plans to get financial help from a parent and take out an 80 percent interest-only loan that would guarantee her five years of payments at a fixed rate. Is she confident she can still make the payments or refinance when the payments jump in five years? ‘I think so,’ Gutierrez said. ‘After that I would see what rates are doing. You can’t predict the future. You either jump or you don’t. I’m jumping.’” |
