Risky Home Loan Financing Most Popular Out West
Borrowers in California, Nevada, Hawaii and Florida face the harshest drought if banks cut off some popular, but risky mortgages.
These states surpassed the national average last year for payment-option loans, the type of adjustable-rate mortgages that allow the borrower to minimize monthly payments so they don’t even cover the interest on the loan.
California led the U.S. in originations of payment-option ARMs, with 24 percent of all its mortgage refinancing activity and first mortgages falling into this category last year.
These home loans, also termed negative amortization loans because they tack any deferred interest on to the back of the loan, made up about 17 percent of Nevada mortgage loans issued last year, followed by 15 percent for Hawaii and about 13 percent for Florida.
In contrast, payment-option ARMs made up 11 percent of all mortgages last year in the United States, estimates LoanPerformance.
“You’ve seen growth in the states with high home-price appreciation,” said LoanPerformance spokesman Bob Visini.
The states with the lowest percentage of payment-option ARMs? Mississippi mortgage and Arkansas home loans, where just 0.6-1.3 percent of loans fell into this category.
After a fall-out in the bad credit home loan market, where lenders issued loans to borrowers with poor credit history, banks are now cutting back on loans to better credit borrowers. Under the gun are loans that carried special features, like minimal income documentation requirements.
Some of the nation’s largest lenders, including National City, Wachovia and Wells Fargo Home Mortgage have started to clamp down on making new non-traditional mortgages amid the slumping housing market, leaving home buyers with fewer options.
A broker at mortgage broker firm ACE Mortgage Funding LLC estimated Friday that 90 percent of mortgages that don’t conform to standards set by Fannie Mae and Freddie Mac have disappeared in the last three days.
As one visual sign of banks’ cooling to a variety of mortgages they had introduced over the years, the broker’s morning mortgage rate sheet dropped to one page - versus 10 pages usually.
The mortgage broker asked not to be identified.
One hit with borrowers over the last few years was the interest-only loan, which allowed buyers to pay just interest for a fixed period of time. Interest-only mortgages made up about 22 percent of all U.S. loans last year.
Nevada outpaced the average in this category too, with 34 percent of its mortgages deemed interest-only; California stood at 32 percent and the District of Columbia 33 percent.
Interest-only and payment-option ARMs together made up one-third of the U.S. mortgage loan origination market last year.
The volume of these mortgages increased swiftly during the housing market boom, particularly in states where fast-rising home prices made it harder for borrowers to cover mortgage payments - and easier to sell homes for a hefty gain.
In California, payment-option ARMs made up just 0.8 percent of all loans in 2003 before jumping to 7.5 percent in 2004 and more than 18 percent in 2005.
SOURCE: CNN Money