Qualifying For A Home Loan Could Get Tougher
by Broderick Perkins
If you've gotten off the fence and are just beginning your search for a home, get away from the fence and into a home as quickly as possible -- especially if you found it difficult to qualify for a mortgage.
Pressure is building again to make mortgages more difficult to land.
With interest rates ratcheting up on adjustable rate mortgages (ARMS), the feds are planning to put more heat on lenders to tighten underwriting rules on home loans, especially more risky home loans with rates that don't sit still. Federal regulators are also scrutinizing loans that require little or no documentation about a borrowers' income, expenses or ability to repay the mortgage.
Years of low-interest rates, combined with growing numbers of easy-money mortgages including interest-only loans, option ARMs and others have allowed buyers to cope with record-setting, skyrocketing home prices.
ARMs come with initially lower rates, hence smaller payments that lend borrowers more leverage to buy more expensive homes or homes for which they may not have otherwise qualified. In the land of high home prices fixed-rate mortgages (FRMs) with their higher rates and higher mortgage payments are pricing a growing number of would-be home buyers out of the market.
ARMs, however, could begin to price home owners out of their home.
ARMs' cheaper initial rates are tied to home loan indexes, the interest rate starting point to which margins are added to set and move the actual ARM rate. The indexes are up and rising this year, nearing levels double what they were at some points last year.
The popular prime rate, for example, is now at 7.25 percent compared to just 5 percent a year ago and a static 4 percent for the last half of 2003 through the first half of 2004.
Federal monetary system experts are concerned too many home owners may soon be saddled with home loans they can't afford as their monthly payment rises beyond their financial reach.
In the third quarter, mortgage research firm Loan Performance said 33 of first mortgages approved by lenders were nontraditional loans, compared with 1 percent five years ago.
Within the next week or two, federal monetary officials plan to release a second set of guidelines aimed at lenders with portfolios heavy with the riskier loans. The feds want lenders to roll back the number of originations on riskier loans through tighter underwriting standards. That will make it more difficult for home buyers to land a loan, especially home buyers already on the border line of qualifying for a mortgage.
"Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult," said Comptroller of the Currency John C. Dugan in an early December speech to the Consumer Federation of America.
"At the same time, too many lenders have been attracted to the product by the prospect of booking immediate revenue without receiving cash in hand, a process that often masks underlying credit problems that could ultimately produce substantial losses," Dugan added.
Earlier this year, on May 16, coinciding with a heightened level of warnings about escalating home prices, industry fraud, the potential for higher interest rates and other concerns, the Federal Reserve, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, issued the joint "Credit Risk Management Guidance For Home Equity Lending".
The advisory said the quality of lenders' home equity portfolios was of concern, especially if "interest rates rise and home values decline. Sound underwriting practices and effective risk management systems are essential to mitigate this risk."
However, months later, rather than tighten requirements for home loan approvals, almost 40 percent of domestic banks reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide, while about 30 percent, indicated that over the same period they had increased the maximum size of second mortgages, according to the Federal Reserve Board's "October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices".
What's more, about one-fourth of those surveyed said that they had narrowed spreads of mortgage rates over an appropriate market base rate (which means there are more loans with attractive rates available) and that they had increased the maximum loan-to-value ratio on such loans (which means borrowers are allowed to carry even greater debt loads).
In his speech, Dugan dissected a payment option mortgage to reveal what could be a very rude awakening for some borrowers.
During the first five years of payment options, the loan allows the borrower to select from a menu of payment possibilities, low to high. If the borrower chooses the lower monthly payment he or she will pay little if any of the principal during the period. Meanwhile, the loan balance grows, amortizing negatively until the sixth year when payments are adjusted to ensure the principal is paid off over the remaining 25 years of the loan.
With a typical $360,000 payment option mortgage that begins with a 6 percent interest, monthly payments could increase by 50 percent in the sixth year if interest rates do not change. If rates jump two percentage points, to 8 percent, monthly payments could double.
"Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a larger mortgage -- at least for the five years before the onset of payment shock?"
Dugan also asked, "And are lenders really prepared to deal with the consequences - including litigation risk - of providing such products in markets where real estate prices soften or decline, or where interest rates substantially increase?"
Only time, and the fed's second advisory this year, will tell.
If you've gotten off the fence and are just beginning your search for a home, get away from the fence and into a home as quickly as possible -- especially if you found it difficult to qualify for a mortgage.
Pressure is building again to make mortgages more difficult to land.
With interest rates ratcheting up on adjustable rate mortgages (ARMS), the feds are planning to put more heat on lenders to tighten underwriting rules on home loans, especially more risky home loans with rates that don't sit still. Federal regulators are also scrutinizing loans that require little or no documentation about a borrowers' income, expenses or ability to repay the mortgage.
Years of low-interest rates, combined with growing numbers of easy-money mortgages including interest-only loans, option ARMs and others have allowed buyers to cope with record-setting, skyrocketing home prices.
ARMs come with initially lower rates, hence smaller payments that lend borrowers more leverage to buy more expensive homes or homes for which they may not have otherwise qualified. In the land of high home prices fixed-rate mortgages (FRMs) with their higher rates and higher mortgage payments are pricing a growing number of would-be home buyers out of the market.
ARMs, however, could begin to price home owners out of their home.
ARMs' cheaper initial rates are tied to home loan indexes, the interest rate starting point to which margins are added to set and move the actual ARM rate. The indexes are up and rising this year, nearing levels double what they were at some points last year.
The popular prime rate, for example, is now at 7.25 percent compared to just 5 percent a year ago and a static 4 percent for the last half of 2003 through the first half of 2004.
Federal monetary system experts are concerned too many home owners may soon be saddled with home loans they can't afford as their monthly payment rises beyond their financial reach.
In the third quarter, mortgage research firm Loan Performance said 33 of first mortgages approved by lenders were nontraditional loans, compared with 1 percent five years ago.
Within the next week or two, federal monetary officials plan to release a second set of guidelines aimed at lenders with portfolios heavy with the riskier loans. The feds want lenders to roll back the number of originations on riskier loans through tighter underwriting standards. That will make it more difficult for home buyers to land a loan, especially home buyers already on the border line of qualifying for a mortgage.
"Too many consumers have been attracted to products by the seductive prospect of low minimum payments that delay the day of reckoning, but often make ultimate repayment of growing principal far more difficult," said Comptroller of the Currency John C. Dugan in an early December speech to the Consumer Federation of America.
"At the same time, too many lenders have been attracted to the product by the prospect of booking immediate revenue without receiving cash in hand, a process that often masks underlying credit problems that could ultimately produce substantial losses," Dugan added.
Earlier this year, on May 16, coinciding with a heightened level of warnings about escalating home prices, industry fraud, the potential for higher interest rates and other concerns, the Federal Reserve, along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration, issued the joint "Credit Risk Management Guidance For Home Equity Lending".
The advisory said the quality of lenders' home equity portfolios was of concern, especially if "interest rates rise and home values decline. Sound underwriting practices and effective risk management systems are essential to mitigate this risk."
However, months later, rather than tighten requirements for home loan approvals, almost 40 percent of domestic banks reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide, while about 30 percent, indicated that over the same period they had increased the maximum size of second mortgages, according to the Federal Reserve Board's "October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices".
What's more, about one-fourth of those surveyed said that they had narrowed spreads of mortgage rates over an appropriate market base rate (which means there are more loans with attractive rates available) and that they had increased the maximum loan-to-value ratio on such loans (which means borrowers are allowed to carry even greater debt loads).
In his speech, Dugan dissected a payment option mortgage to reveal what could be a very rude awakening for some borrowers.
During the first five years of payment options, the loan allows the borrower to select from a menu of payment possibilities, low to high. If the borrower chooses the lower monthly payment he or she will pay little if any of the principal during the period. Meanwhile, the loan balance grows, amortizing negatively until the sixth year when payments are adjusted to ensure the principal is paid off over the remaining 25 years of the loan.
With a typical $360,000 payment option mortgage that begins with a 6 percent interest, monthly payments could increase by 50 percent in the sixth year if interest rates do not change. If rates jump two percentage points, to 8 percent, monthly payments could double.
"Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a larger mortgage -- at least for the five years before the onset of payment shock?"
Dugan also asked, "And are lenders really prepared to deal with the consequences - including litigation risk - of providing such products in markets where real estate prices soften or decline, or where interest rates substantially increase?"
Only time, and the fed's second advisory this year, will tell.
posted by Susan VanSlyke at 7:12 AM
0 Comments:
Post a Comment
<< Home