Estate and mortgage
Lenders, Analysts Don"t See Risk In "Risky" Loans
So long as your creditworthiness is pristine and the property you want to buy appraises for the loan you seek, high-leverage mortgages, which some have considered among the riskiest, will continue to make easy mortgage money, well, easy. Due largely to falling and flat home sales and prices, lenders have stiffened underwriting standards on the collateral end of the deal by more carefully scrutinizing appraisals, home inspections, market conditions and other property value indicators. However, they only briefly tightened the reigns on the growth in so-called "no-doc" mortgages and others deemed riskier than traditional fully documented, fixed-rate mortgages. "Alt-A" loan volumes rebounded to record levels in the second quarter after a first quarter downturn, according to Standard & Poor"s "Trends in U.S. Residential Mortgage Products: Alt-A Sector Second-Quarter 2006". S&P said Alt-A mortgage securities increased by 33 percent in the second quarter this year compared to the first quarter and a whopping 50 percent above the second quarter last year. "This growth is a result of the dramatic increase in the popularity of affordability products during the first half of 2006," said S&Ps primary credit analyst Jeff Watson. In the S&P lexicon, Alt-A loans are alternative loans for A-rated borrowers. They go to borrowers with top-notch credit, a condition that helps offset the risk related to the fact that the loans require no verification of a job, income or assets -- an alternative to loans that do require documentation. No-doc loans help lenders speed through loan applications to out pace competitors when there"s high mortgage demand. "Instead of taking five days to qualify a borrower it might take one or two days. It also saves them (lenders) a little money to speed it through and they can issue loans quicker than competitors," Watson added. Adam Tempkin, spokesman for S&P"s Structured Finance division said, again, going to borrowers with A-1 credit, the Alt-A batch of loans include: Loans with a loan-to-value ratio in excess of 80 percent, but don"t require primary mortgage insurance. Loans to borrowers who are temporary resident aliens. Loans secured by a non-owner occupied property. Loans that don"t require the borrower"s expenses be less than a specified percentage of income. Experts had feared such loans and others would make home owners carrying them the first casualties during a market down turn. Foreclosures and defaults in some areas have begun to rise, but remain below historic levels and the continued growth in Alt-A loans indicate the risk is manageable -- so far. "We haven"t seen any performance deterioration," Watson said. In addition to helping lenders speed the loan process and beat the competitors, Alt-A loans also give buyers more leverage because the most popular Alt-As are adjustable rate mortgages (ARMs) that come with optional payments, interest-only payments, and second mortgages. Those terms allow borrowers to achieve home ownership with little up front cash and smaller monthly mortgage payments. Option ARMs and interest-only loans comprised 77 percent of the volume in the second quarter this year, up from 61 percent during the second quarter last year. "Option ARMs are at the forefront of this trend, as they far outstrip other affordability products in popularity among prime credit borrowers. In fact, their popularity should further accelerate, as new hybrid option ARM products become more widely available during the second half of 2006," Watson said. Unlike traditional option ARMs, hybrid option-ARM products feature a fixed interest rate for the first three to seven years following origination. After this initial fixed-rate period, the interest rate adjusts based on a set index. Other trends S&P mentioned, include: More and more first mortgages are being coupled or piggy-backed with simultaneous second mortgages. In second-quarter 2006, this percentage of Alt-As that included piggy-backs was more than 63 percent, up from 50 percent during the second quarter a year ago. Cash out loans were 28 percent of Alt-A loans, up from 25 percent a year ago -- "somewhat of a concern in a depreciating market," S&P reported. More and more investors are using Alt-A products but more traditional fully amortizing fixed rate loans remain the investment market sector"s staple. Depending on how much the housing market continues to slow, the current growth in Alt-A loans may not be sustainable. "Standard & Poor"s expects total (Alt-A) volume in second half 2006 to stabilize, rather than to continue to grow above current levels," Watson said.Loans next day commented:
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