Sunday, November 27, 2005

Housing: Exotic Loans, Regulation and Foreclosures

by Bill McBride on 11/27/2005 01:40:00 PM

These three articles seem to go together ...

The AP reports: Mortgage packages head into iffy stage

With the housing market cooling and loan demand shrinking, banks and other lenders are turning to nontraditional and sometimes riskier mortgages to bring in more business and make up their lost revenue.
...
Many lenders have turned to mortgage products designed to lower monthly loan payments and to help borrowers qualify more readily for larger loan amounts, while others require little in the way of documentation during the approval process. These loans do make it easier for some people to get mortgages, but they also can raise the possibility that some borrowers may end up in default.
The Philadelphia Inquirer reports: New rules coming on 'exotic' mortgages
In the first six months of the year, demand for alternative adjustable-rate mortgages, also known as Alt-A or option ARMs, and interest-only mortgages increased as the difference in interest rates for standard ARMs and fixed-rate mortgages narrowed, said Doug Duncan, chief economist for the Mortgage Bankers Association of America in Washington.

The share of first-mortgage originations that were interest-only loans rose to 23 percent from 17 percent during the same period last year, and the Alt-A share increased to 11 percent from 8 percent.
...
"The markets with a high percentage of these loans are more fragile to shocks such as rising interest rates," [National Association of Realtors' chief economist David] Lereah said last month during the Realtors' convention in San Francisco.

Lereah went to the Office of the Comptroller of the Currency, which oversees the nation's banks, "to talk about the behavior of lenders who are offering these exotic mortgages."

"I'd like to see more guidelines on the percentage of these loans that can be issued, even if it slows home sales, to ensure a soft landing for the market," he said.

He found that he and the comptroller, John C. Dugan, were on the same page. New guidelines on nontraditional loans are due Jan. 1 ... (emphasis added)
And the North County Times (San Diego) reports: As housing price increases slow, more mortgages going into default
Foreclosure activity has edged up in recent months, providing yet another small but clear sign of cooling in Riverside County's housing market. Banks and other lenders sent 1,266 notices of default to Riverside County borrowers in the third quarter, a move that gives homeowners 90 days to catch up on payments before moving towards an auction, according to La Jolla-based DataQuick Information Systems. That number is up from 1,121 in the second quarter and 1,116 notices in the third quarter of 2004.

The shift reflects a return toward historical averages and comes amid signs that Southwest County's real-estate party is winding down.

"Even now, the level of foreclosure activity is unnaturally low," DataQuick analyst John Karevoll said.

Homeowners, particularly first-time homebuyers in suburban markets such as Southwest County, always face a certain amount of financial distress, Karevoll said. That's particularly true now, with adjustable-rate mortgage payments rising faster than salaries. The median monthly payment in October was $2,169, up 20 percent from October 2004, according to DataQuick.