Risky loans fall out of favor

From the Record:

Refinancing replaces ARM loans

Faced with rising monthly payments, many homeowners who took out adjustable-rate mortgages a couple of years ago now want to refinance into fixed-rate loans.

“People are moving toward safe and secure fixed-rate mortgages,” said Susan M. Wachter, a real estate professor at the Wharton School of Business at the University of Pennsylvania. “There’s an increasing recognition out there of the potential for mortgage payment shocks with adjustable-rate mortgages.”

But some who want to refinance now may find that tighter lending standards, combined with flat or lower house values, have closed off that option.

A buyer who took out a no-down-payment loan, for example, may not have any equity because house values have flattened or even declined in the last couple of years. And lenders are no longer making loans where the homeowner has no skin in the game.

“A lot of those products have gone away,” said Robert Wilderotter of the Real Estate Mortgage Network in River Edge.

He predicted that some of these homeowners — in a house they can’t afford, with no way to get a cheaper mortgage or sell their house at a profit — will end up in foreclosure.

Many recent homeowners bought their houses using mortgages that kept payments artificially low in the first three to five years. The loans had adjustable interest rates or allowed homeowners to start with “interest-only” payments. And with some “option” loans, homeowners could even pay less than the full monthly interest, adding that amount to the loan balance.

But you’ve got to pay sometime, and for lots of people, “sometime” is approaching fast.

“Borrowers have a new understanding of some of the pitfalls of these exotic instruments,” Wachter said.
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Alex Grinewicz, chief lending officer for Columbia Bank in Fair Lawn, expects the refinance rush to pick up even more next year. “That’s when a lot of adjustables are coming due,” he said.

He said homeowners should consider refinancing now because interest rates are still at relatively low rates, and banks are aggressively courting business.

But lenders are undeniably more conservative than they were a few years ago. The mortgage industry has tightened loose lending standards, under pressure from regulators. They’re also reacting to the fact that many subprime borrowers are having trouble making their monthly payments.

Some who were subprime borrowers a few years ago may be able to move into the regular mortgage market, if they have improved their credit scores in the meantime, said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains company that tracks the market. Those borrowers can now refinance to a loan with an interest rate below 7 percent, he said.

But others will not be so lucky. And it’s not as if they can solve their problems by simply selling. The housing market has softened, and sellers who bought in the last couple of years may get less than they paid. Buyers are hanging back, hoping to get a better deal if house prices fall further, said Alex Giassa, a mortgage consultant with First Interstate Financial in Paramus.

“The buyers are very tentative,” Giassa said.

Homeowners in such a bind are advised to call their lenders as soon as they realize they’re going to have problems paying. They may be able to work out payment plans that give them a break.

“You don’t want to wait till you haven’t made payments for several months,” Gumbinger said. “That makes it that much more adversarial.”