Monday, May 23, 2005

Agency Sounds Warning On Stated-Income And Interest-Only Mortgages

by Kenneth R. Harney

An important mortgage market player has sounded an alarm about limited-doc and interest-only features in a growing percentage of home loans, especially those made to purchasers with subprime credit.

In an advisory issued last week, Wall Street's Dominion Bond Rating Service, which assigns risk ratings to mortgage-backed securities pools, expressed "concern" about lenders' potential "easing of credit standards" to boost origination volumes in the post-refi boom climate of 2005.
The rating agency cited interest-only and "stated documentation" loans in new subprime mortgage pools as especially worrisome. "Stated" doc mortgages generally do not require homebuyers to provide hard evidence of income and assets to support their applications. Interest-only loans allow home buyers reduced monthly payments -- there is no principal reduction for an agreed-upon initial period -- but then convert to full amortization for the balance of the term.

Dominion said "mortgages underwritten (with) minimal documentation sometimes account for as much as 50 percent of mortgage pools" in the subprime arena. Yet the no-doc/stated-income concept was originally designed to assist self-employed, business-owning homebuyers with solid credit histories who preferred not to divulge their full financial details. The idea was not designed for buyers with marginal incomes and credit.

No-doc "has since been expanded to include salaried borrowers who cannot or will not show proof of income," said Dominion in its advisory. Some analysts have called such mortgages "liar loans" because the income or assets claimed by the applicant may be illusory or fraudulent. That potential, in turn, raises the chance of future delinquencies and foreclosures.

Dominion is hardly alone in its opinions. Last spring, two major mortgage insurance companies blew the whistle on "NINAs" -- no income, no asset verification loans -- and curtailed issuance of new insurance to no-doc borrowers with low downpayments.

"It may be stating the obvious," said Curt Culver, president and CEO of Mortgage Guaranty Insurance Corp. (MGIC), the largest underwriter in the industry, "but you can't document what you don't have. In many instances (NINAs) are allowing borrowers to do just that. Why wouldn't a borrower choose to fully document their income to assure that they get the lowest possible rate?"

Another insurer, United Guaranty, stopped underwriting non-docs after investigators found that in 90 percent of NINAs that defaulted, mortgage or realty professionals working with the home buyers knew in advance they really didn't have the income or assets necessary to afford the house.

Dominion's concerns about interest-only subprime loans centered around the fact that the industry has "only a limited performance history" on this breed of mortgage. Other analysts have pointed out that interest-only mortgages have a heightened propensity to default because of possible "payment shocks" after the initial low-payment period expired.

For example, say a home buyer takes out a 30-year $333,700 hybrid ARM with an interest-only period of five years. The lender sets the initial fixed payment rate at 5.25 percent -- or $1,460 a month. But in the 61st month, the loan morphs into a one-year LIBOR-indexed adjustable with a standard 2.25 percent margin. With the onset of principal reduction, plus a compressed 25-year remaining amortization term, the monthly payment due from the homeowner would shoot up by 30 percent overnight -- to $1,895 -- if market rates remained flat. But if rates in the economy overall rose by just 1.5 points during the five-year period -- a scenario not unlike what could happen under current Federal Reserve monetary policies -- the payment due in the 61st month would jump by 50 percent to nearly $2,200 a month. That might well be too great a jolt for the homeowners to handle.

The bottom line for realty and loan professionals: Tempting though it may be to "make the deal go through" with the help of short-term payment reduction techniques such stated-income and interest-only, the long-term result for home buyers with subprime credit could prove disastrous -- loss of their home to foreclosure.

Read more at Citywide Services


alex said...

I really liked the information on home loans, great job! I have my own home loans secrets blog if you would like to come and see what I have on mine.

The Real Estate Answer Man said...

Learn How The SMART Real Estate Investors Get RICH....And Its' NOT With Rentals, Forclosures Or The "Fix And Flip" Game.....

Click Here For More

Real Estate Investor

The Real Estate Answer Man said...

Real Estate investors........ Are You Sick Of The "UGLY HOUSE", "Fix And Flip" Or Rental Property Game And All Of The Headaches That Come With It?

Click Here For More

sherrifs sale

Johnny said...

Hello, just visited your blog, it's geat. I also have a bad credit loan related blog with some useful articles about the topic. Hope that it is helpful to you.

De Post Man said...

Nice post. I also have a site talking about credit related issues . Take a look if you have time. loan mortgage

Raven said...

Nice blog feel free to check out mine my blog talks about home loan the link is here home loan you can find some good information when looking for a home loan

Health said...

Hey, you have a great blog here! I'm definitely going to bookmark you!

I have a **morgage** site/blog. It pretty much covers ##morgage saver## related stuff.

Come and check it out if you get time :-)

Mortgage Center said...

Hi thanks for your blog, I liked it! I also have a blog/site about premier mortgage
that covers premier mortgage
related stuff. Please feel free to visit.

Anonymous said...

Was wird die Auswirkung im Ende sein?With Respect, Eladia avoid mortgage foreclosure

Anonymous said...

Everyone needs a good loan at some point in time. If you are looking for home improvement loan uk make sure have all the resources at your fingertips.

The website has a great informational directory on home improvement loan uk so you can find exactly what you need.

Anonymous said...

Your blog is creative Keep up the great work. If you have a mortgage issue, I'm sure you'd be interested in Bad Credit? mortgage and divorce

Anonymous said...

Hi #NAME#. Just found your site via contact lenses. Although I was looking for contact lenses I was glad i came upon your site. Thanks for the read!

Debt Consolidation Refinance said...

Great Blog! I love to see informative sites and active discussion. I have bookmarked this site so I can check in from time to time. If you have a chance check out this site http:\\ which has alot of valuable info on Low interest rate mortgage Thanks again for the Blog

Debt Consolidation Refinance said...

I can't believe some of the stuff I've read. I have a very useful resource at http:\\ that I found at Mortgage and Divorce for anyone who needs a mortgage even with bad credit or a regular real estate loan for any purpose, even debt consolidation, http:\\ is the place to look.

Anonymous said...

You don't have to be a broker or banker to make money in the mortgage business anymore! Just furnish us leads and you get 10% of what we make whether that's $2,000 or $20,000 a loan! And credit is NEVER a problem because we know how to get a 750 fico!. Just introduce borrowers home equity loans and other people like yourself who want to this new loan business, without all the hassle and expense and you'll make it big. We offer unlimited loans in 48 states and because we do business with 437 lenders and SO CAN YOU. So visit us to learn more at home equity loans