MBA Survey Depicts Decrease on First Mortgages, Increase in Nontradtional Mortgage Demand

According to a survey released by the Mortgage Bankers Association trade group, the first half of 2006 was not a popular time for first mortgage originations.

Home mortgage application volume decreased 16 percent in the first half of the year, while strong demand continued for interest-only and payment-option mortgages, or so-called “nontraditional” mortgages.

“In the context of a decelerating housing market and a slowing of overall mortgage originations activity, consumers continued to choose IOs (interest-only) and payment-option loans in the first half of 2006,” said Doug Duncan, chief economist and senior vice president of research and business development for the Mortgage Bankers Association.

The proliferation of nontraditional mortgages has caught the attention of banking regulators who fear some borrowers may be at high risk of default because they may be getting loans they don’t fully understand. The Office of the Comptroller and other federal bank regulators issued new guidelines on Sept. 29 directing banks to tighten underwriting and disclosure standards for these types of unusual loans.

The guidelines instruct banks to use the fully indexed rate when analyzing a borrower’s ability to repay interest-only mortgages and payment-option, negative-amortization home loans.

Key findings from the MBA survey included:

• For first mortgages, fixed-rate mortgages - including interest-only loans - accounted for 49 percent of loans in the first half of 2006, compared with 47 percent in the second half of 2005.
• Interest-only loans accounted for 26 percent of originations in the first half of 2006. However, the composition of interest-only originations changed, with fixed-rate interest-only loans accounting for 24 percent of all interest-only loans in the first half of 2006, compared with 13 percent in the second half of 2005.
• Payment-option mortgages (”option ARMs”) accounted for 15 percent of the dollar volume of originations in the first half of 2006, up from 8 percent in the second half of 2005.
• First-time home buyer purchases represented almost one in three home purchases in the first half of 2006. Their average loan amount was $189,883, significantly less than the average loan amount of $236,517 for non-first-time home buyers.
• Of the first half originations, 19 percent were for single-family attached homes, 75 percent for single-family detached homes, 1 percent for manufactured and mobile homes and 4 percent for 2-4 unit structures.

The overall picture is painted as one in which individuals remain hesitant to enter the market. Those that do focus on nontradtional, bad credit mortgage loan options because they offer low, initial rates/monthly bills.