Strong demand for non-traditional mortgages

From Inman News:

‘Nontraditional’ mortgages rise as overall origination falls

A slowing housing market has put a damper on first-mortgage origination volume for the first half of the year, an industry survey released Monday shows.

First-mortgage origination volume decreased 16 percent in the first half of 2006, while strong demand continued for interest-only and payment-option mortgages, or so-called “nontraditional” mortgages, according to a survey from the Mortgage Bankers Association trade group.

The 16 percent decrease in first-mortgage originations from the second half of 2005 was driven by a 10 percent decline in purchase mortgage volume and a 22 percent decline in refinance volume, MBA said.

“In the context of a decelerating housing market and a slowing of overall mortgage originations activity, consumers continued to choose IOs (interest-only) and payment-option loans in the first half of 2006,” said Doug Duncan, chief economist and senior vice president of research and business development for the Mortgage Bankers Association, which produced the survey.

For first mortgages, fixed-rate loans, including interest-only loans, accounted for 49 percent of loans in the first half of 2006 compared with 47 percent in the second half of 2005.

Interest-only loans accounted for 26 percent of originations in the first half of 2006. However, the composition of interest-only originations changed, with fixed-rate interest-only loans accounting for 24 percent of all interest-only loans in the first half of 2006 compared with 13 percent in the second half of 2005. Payment-option mortgages (“option ARMs”) accounted for 15 percent of the dollar volume of originations in the first half of 2006, up from 8 percent in the second half of 2005.

First-time home buyer purchases represented almost one in three home purchases in the first half of 2006. Their average loan amount was $189,883, significantly less than the average loan amount of $236,517 for non-first-time home buyers.

Of the first half originations, 19 percent were for single-family attached homes, 75 percent for single-family detached homes, 1 percent for manufactured and mobile homes and 4 percent for 2-4 unit structures. About half of single-family attached home originations were for condos or cooperatives, the remainder being for other single-family attached properties such as townhouses, duplexes and rowhouses.

In a separate survey released Monday, MBA found that first-mortgage subprime origination volume decreased 30 percent in the first half of 2006 from the second half of 2005. The trade group said that subprime loans made up 19 percent of all originations in the first half of the year.

The average loan amount for subprime loans during the survey period was $200,167, a 7 percent increase from the second half of 2005.

Fifty-five percent of subprime originations during the first half of 2006 were for refinance purposes.

Based on loan count, one in four subprime purchase loans was made to a first-time home buyer, according to the survey.

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61 Responses to Strong demand for non-traditional mortgages

  1. UnRealtor says:

    “In the context of a decelerating housing market and a slowing of overall mortgage originations activity, consumers continued to choose IOs (interest-only) and payment-option loans in the first half of 2006”

    Should be some nice foreclosures coming into the marketplace in the next couple of years.

  2. v says:

    “Fifty-five percent of subprime originations during the first half of 2006 were for refinance purposes.”

    It may not be just new buyers who will be in trouble.

  3. Lindsey says:

    Legendary poker player Doyle Brunson has gained a lot of wisdom in his years as a professional gambler. I once read a story he wrote about the importance of realizing that just because you understand something, it’s not reasonable to expect other people to understand it as well.

    I think that’s exactly what’s happening here. Even though I would never have taken one of these toxic loans, I thought that by the start of this year most people would have been clued in. Wrong again.

    BTW, I will stick to my contention that people do not choose these loans, but are chosen for them. It’s not possible that even 1/10th of 1% of people walk into a brokers office thinking, “What I need is one of those no-doc, interest-only, adjustable rate loans.”

    The current system has created massive incentives to make horrible loans and so far hasn’t shown there’s any penalty to the issuers and underwriters for doing so. Jail may not be in their future, but I’m guessing bankruptcy is, and in the end society at large (that means you and me) will be stuck cleaning up this mess.

  4. curiousd says:

    lindsey, you are right. people are not chosing these loans necessarily. i have a uninformed family member that refinanced into one w/out understanding what she had done. it cost her lots of money recently, and it was too late when she called me upset about being sold on it.

  5. 2008 Buyer says:

    I would have to disagree with you on this on. IO loans make perfect sense for someone who gets paid a commission or bonus on a quarterly or yearly basis. Lots on Wall Street workers have these loans and make a large principal payment after they receive their bonus. This would be a great product if you wanted to stay in property for 2 or 3 years in an appreciating (definitely not now) market. Three or four years ago, you could have bought a condo in a hot market with this product, simply made the interest payments (saving the principal portion) and sold in 2005 and made out pretty good simply off of the equity that built up (again in the really hot markets where appreciation was ridiculous). Every product out there has a purpose, some people just don’t use it properly. The key is making sure you can qualify for this type of loan at a full amortizing rate. I can’t defend POA, doesn’t make sense to me.

    What the real issue is….borrowers getting these type loans because its the ONLY way they could get into a house (merely delaying the pain when it resets) and taking any type of loan (IO, Fixed) out to purchase a home in this market.

  6. Lindsey says:


    I here the Wall Street thing all the time and it makes sense, except for one thing, that is not at all what has happened in reality. When the loans were less than 1% of the market 15 years ago, that might have been the case, but it’s just beyond reason to say the people getting these loans fit the profile you’ve created.

    I am certain these loans do have a legitimate purpose, they just haven’t been legitimately issued.

  7. 2008 Buyer says:

    LOL…I would have to agree with you there, its not being used properly by the majority of the people who have them. I would venture to say that the majority of the affordability (POA, IO, 40 yr) loans and the liar (stated no doc, limited doc) loans which helped fuel this overpriced market were taken out by borrowers who probably never should have been in a house in the first place.

  8. lisoosh says:

    What happened to those federal “recommendations”?

    On the radio today, still hearing ads for 1% interest mortgages, no money down, no documentation necessary. The explanation part (where they have to say things such as it is limited time only , negative amoratizing etc), was so speeded up it was like hearing Mickey Mouse on speed. They are still advertising $500,000 mortgages for payments of “only” $1300 a month and getting away with it.

    On another note, an acquaintance went to work for a mortgage company and in the 6 months she has worked there has yet to make a sale.

  9. metroplexual says:

    2008 buyer,

    IOs were invented for Executives that were getting moved very often. Closing costs represented a major barrier to their buying so this loan was devised as a way to get them in a house with cheaper payments and to see eqity gains before they moved in 3 years to their next city.

  10. Blow Blow blow your house down says:

    “At a recent meeting with her Las Vegas real estate firm’s 200 agents, Joanne Levy told them they needed to deliver a stark message to clients. They would tell them that unsold homes are at a record level and sellers need to lower their prices.”

    “In other words: the boom is over. ‘They want the 2004, 2005 market,’ Levy said of today’s clients. ‘We don’t have that.’”

    “With stubborn sellers refusing to relent on asking prices, many prospective buyers have kept their hands in their pockets. Some industry observers fear that bull-headed home sellers could worsen a downturn by driving up the inventory of homes for sale and running off would-be buyers.”

    “‘Sellers have not caught up with the reality of the marketplace despite the proliferation of ‘For Sale’ signs,’ said Howard Glaser, a mortgage industry analyst in Washington, D.C. ‘There is a lag period between sellers’ expectations and the reality of the marketplace,’ he said, and shaking them out of their high-price fantasy ‘is more psychology than science.’”

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