California Mulls Tighter Bad Credit Mortgage Restrictions
Lawmakers began considering restrictions on unorthodox California mortgage lending practices that have allowed hundreds of thousands of Golden State residents to buy homes they otherwise could not afford.
According to the Press-Enterprise, half of all new home loans in California are something other than the traditional 30-year, fixed-rate mortgage.
They use features such as no down payment, or variable interest rates, a way to give borrowers creative payment options such as paying only the interest or even less than that each month.
Such a low introductory payment or teaser rate is often offered in exchange for higher mortgage bills that will kick in years later, sometimes tripling or quadrupling monthly payments.
Regulators said many of those riskier California mortgage loan options were taken out in 2004 and 2005 and will wreak havoc as they start resetting to higher rates this year.
“The exposure to these sorts of products, the growth, is unprecedented,” Raphael Bostic, an associate professor at the University of Southern California School of Policy. “The regulatory oversight of these types of practices is relatively lax.”
Such bad credit home loans have long been offered to buyers with shaky credit or lower incomes. In other cases, even middle-income home buyers turned to them as California housing prices soared in recent years.
Such buyers made use of option-payment adjustable loans and interest-only mortgage loans to purchase houses they would have difficulty affording using 30-year fixed mortgages.
In September, regulatory agencies issued guidelines ensuring federally regulated lenders to better gauge borrowers’ ability to pay before using non-traditional mortgage loans, which comprise about a third of the American home mortgage market.
Under those guidelines, lenders are told to avoid making loans that encourage home buyers to rely on selling or refinancing their homes into more traditional mortgages before they are caught by higher mortgage rates and monthly payments.
California is considering setting similar rules for the state-regulated lenders, as have 24 other states, said Sen. Michael Machado, D-Linden, chairman of the Senate Banking, Finance and Insurance Committee.
California is among the states where such bad credit home loan lending practices were used aggressively, as housing prices soared beyond most people’s ability to buy:
- The median price of a home in California was $474,000 in December, according to San Diego-based DataQuick Information Systems.
- Nationwide, the median price last year for existing homes was $222,000 and $241,600 for new homes, according to the National Association of Realtors.
- About 60 percent of bad credit home loans in California those given to the highest-risk borrowers allowed them to pay only the interest or gave them that option on an adjustable rate mortgage, the Federal Deposit Insurance Corporation (FDIC) estimated in a September report.
When the California housing market began to cool last year, it left many borrowers unable to sell or refinance. They are now facing the prospect of soaring monthly mortgage payments in the next few years as their interest rates climb by as much as 6 percentage points.
About 12.5 percent of the riskier mortgage loans nationally were falling into the delinquent stage by last fall. Nearly 1 million homeowners across the U.S. either lost their homes or missed monthly payments from July to September, according to the Mortgage Bankers Association.
The trend will worsen, the Center for Responsible Lending predicted in a December report.
“We’ve already seen a dramatic increase in foreclosures in California,” said Paul Leonard, California director of the Durham, N.C.-based consumer advocacy center.
Witnesses at Wednesday’s hearing described bad credit mortgage products in which the principal increases instead of decreases as time passes. In some cases, the home loan applicants were not required to prove they had any income or assets or even a job.
In addition to the revelations about no doc loans, other testimony revolved around the new 50-year home loan, which is now being issued by some lenders, and has equity drawbacks compared to the traditional 15 or 30 year products.