You are here
U.S. warns China to overhaul currency system
Concerns Mount About Mortgage Risks
Latest Data Show Move Toward Alternative Loans
Is More Pronounced Than Previously Thought
By Ruth Simon
The Wall Street Journal
Tuesday, May 17, 2005
In the latest sign of how frothy the housing market has become, new
data show the degree to which people are stretching to buy homes in
a hot housing market.
The data, from the Mortgage Bankers Association, show that
adjustable-rate and interest-only mortgages accounted for nearly two-
thirds of mortgage originations in the second half of last year.
Both types of loans have helped fuel the strong housing market since
they carry lower initial monthly payments than do fixed-rate loans,
enabling borrowers to purchase more-expensive homes.
With such loans accounting for an increasing portion of consumer
borrowing, some mortgage analysts worry that the growth of these
loans could cause problems for the housing market and broader
economy. "The situation with interest-only ARMs is just one of
several very scary things going on in the mortgage industry," says
Stu Feldstein, president of SMR Research Corp., a market-research
firm in Hackettstown, N.J. The rise of interest-only loans, combined
with other factors such as higher debt levels and changing
bankruptcy laws, are likely to cause foreclosures to rise, he
says, "possibly dramatically."
Though it has been clear that borrowers in high-priced markets have
been gravitating to products that make homes more affordable, the
shift has been greater than expected. In California, where home-
price growth has been sizzling, interest-only loans accounted for
61% of the mortgages taken out to buy homes in the first two months
of this year, up from 47.1% in 2004 and less than 2% in 2002,
according to an analysis prepared for The Wall Street Journal by San
Francisco researchers LoanPerformance, a unit of First American
Corp. Just 18% of California households can afford to buy a median-
price house using a conventional 30-year fixed-rate mortgage,
according to a report issued this month by the California
Association of Realtors.
If you borrow $350,000 with an interest-only mortgage that carries a
fixed rate of roughly 4.8% for the first five years, here's what you
will pay:
The monthly payment on the loan would be $1,403 during the initial
period.
Even if interest rates don't rise, the monthly payment would jump to
$2,008 after five years.
If rates jump by two percentage points instead, the monthly payment
would jump by 73% to nearly $2,500.
In another report issued this month, mortgage strategists at UBS AG
called the shift to ARMs and nontraditional mortgage products such
as interest-only loans "symptomatic of...the end of the housing
cycle. The thing that all of these loans have in common is that they
allow homeowners to buy a more expensive home than they could have
qualified for with a 'traditional' loan."
The Mortgage Bankers Association conducted the survey of the
interest-only and ARM share of mortgage originations in an effort to
provide more accurate information about the housing market. The
group's survey found that interest-only mortgages accounted for 17%
of loans originated in the second half of 2004. And 46% of loans
were adjustable-rate loans that don't carry an interest-only
feature. The data reflect dollars lent, not the number of mortgages.
This is the first time the group has measured the share of interest-
only loans, in which borrowers lower their monthly outlay by paying
interest and no principal in the loan's early years. It also is the
first time it has looked at loans actually granted, not merely
applications.
The findings are the latest evidence that borrowers have moved
decisively away from traditional 30-year fixed-rate mortgages and
have embraced ARMs and, in particular, interest-only loans, which
used to be a niche product. Though borrowers take out these loans
for many reasons, the shifts come at a time when both home prices
and competition among mortgage lenders has climbed. The MBA's weekly
surveys -- which look only at application volume, not loans that are
actually made -- had put the share of ARMs, including interest-only
loans, at roughly 40% to 50% this year. That is up from as little as
18% of application volume in early 2003.
The surge in ARMs and interest-only loans is particularly notable
because rates on 30-year fixed-rate mortgages remain below 6%, still
low by historical standards. Borrowers typically turn to ARMs as
interest rates climb, but so far the increase in rates has been
modest. Many economists see the current popularity of ARMs and
interest-only loans as the latest sign of how borrowers are
stretching to buy homes they couldn't otherwise afford -- and of how
lenders are more than willing to accommodate them.
Partly because of these products, mortgage originations are expected
to total nearly $2.5 trillion this year, according to the MBA, down
slightly from $2.6 trillion in 2004.
Products such as interest-only mortgages can be riskier than fixed-
rate mortgages, particularly when interest rates are rising. If home
prices fall as rates rise, some borrowers with interest-only loans
could wind up owing more than the value of their home. Even if the
growth in home prices simply flattens or slows, some borrowers could
be squeezed by rising mortgage payments.
In another sign that worries about lending practices are increasing,
federal banking regulators yesterday issued new guidance for lenders
making home-equity loans and lines of credit. The guidelines require
banks to do a more in-depth analysis of borrowers' income and debt
levels and their ability to repay the loan -- instead of relying
simply on credit scores.
Initially aimed at sophisticated borrowers who wanted to free up
cash for other purposes, such as investing in the stock market,
interest-only loans have come to dominate some segments of the
mortgage market. A report issued in January by UBS found that the
interest-only share of jumbo loans -- currently, loans exceeding
$359,650 -- had tripled since the end of 2003.
Michael Menatian, a mortgage banker in West Hartford, Conn., says he
is seeing some borrowers opt for interest-only loans over mortgages
that carry a lower interest rate but result in a higher monthly
payment.
If home prices continue to surge, affordability could this year
reach its worst-ever levels in hot markets such as Los Angeles,
Boston and Miami, according to recent report by Goldman Sachs Group
Inc. senior economist Jan Hatzius.
The MBA survey highlights other changes in the mortgage market that
may increase risks to borrowers and lenders. More than half of the
adjustable-rate loans were "traditional" ARMs, meaning the initial
interest rate is fixed for less than three years. Borrowers who opt
for these loans typically get a lower initial interest rate in
exchange for giving up protection from future rate increases.
Until recently, so-called hybrid ARMs had been a more popular
choice. These loans typically carry a higher initial interest rate,
but are considered a more-conservative option because the interest
rate is fixed for the first three, five, seven or 10 years. That
makes it more likely that the borrowers will move or see their
incomes increase before they face higher payments.
The shift to short-term ARMs has occurred even as the difference
between rates on ARMs and fixed-rate loans has narrowed, reducing
the attractiveness of adjustables. "To have a lower initial monthly
payment, people have gone for shorter-term ARMs," says Fannie Mae
Chief Economist David Berson.
As the use of more novel lending programs becomes commonplace, some
mortgage analysts worry that borrowers are adding to the risks by
combining a number of features -- using, for instance, 100%
financing and an interest-only mortgage or a no- or low-
documentation loan to buy a property for investment. "These things
layer on each other," says Mark Milner, senior vice president and
chief risk officer of PMI Mortgage Insurance Co., a unit of PMI
Group Inc. During the past year, PMI has increased its charges for
insuring riskier loans, Mr. Milner says.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.usagold.com/amk/usagoldmarketupdate.html
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067
214-632-8869
http://www.discountsilverclub.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $1,000 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled GATA.
Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
