Best Websites
Since
1998 BestWebsites.com.my features thousands of best websites
in many
categories of interest with descriptions/reviews given by leading
publications and webmasters.
Home
08-04-2006
Unusual mortgages fit
for some, a risk for others
By Kenneth R. Harney
WASHINGTON
- An important debate is raging in the home mortgage
market, though well beyond the earshot of most consumers.
The issue: wildly popular ``payment option,'' interest-only and
``piggyback'' loans, and the financial risks they pose to home buyers
and lenders alike.
On the one hand, federal financial regulators say the risks are too
significant to ignore, so lenders need to take special care in
evaluating and approving customers who apply for these mortgages. The
regulators want to impose new creditworthiness restrictions and
disclosure requirements forcing lenders to be certain that borrowers
understand the potential dangers.
On the other hand, banks and mortgage companies aren't happy about
the regulators' plans. They say new restrictions are unnecessary
intrusions and could stifle free-market innovations that have expanded
consumers' ability to afford today's high housing prices. From January
through March, lenders bombarded federal banking regulators with
demands to back off or soften the proposed rules. Regulators at the
Federal Reserve Board, FDIC and three other agencies are now studying
the lenders' comments and are expected to announce final plans within
a couple of months.
Why all the fuss? And what might it mean for you as a home buyer or
refinancer? The fuss derives from the fact that payment-option,
piggyback, interest-only and other creative loan concepts can prove
toxic for applicants who really don't understand them. The question is
whether most lenders are taking pains to educate borrowers about how
the loans work, or whether they have been mass-marketing dangerous
mortgages to people with borderline credit profiles, low down payments
and minimal knowledge.
Here's a quick overview:
- Payment-option mortgages have
soared in popularity in the past three years, especially in areas of
the country where real estate prices and appreciation rates have been
high. Payment-option plans typically allow borrowers to choose among
payments each month: a ``minimum'' payment based on an artificially
low start rate and negative amortization (buildup of principal debt);
an interest-only payment involving no principal reduction; or
traditional ``amortizing'' payments based on 15-year or 30-year
schedules.
- Negative amortization options can
add as much as 12 percent to 15 percent onto a home buyer's debt in
the early years of the loan, and lead to monthly payment increases of
100 percent or more after the loan ``resets'' to market rates and a
fully amortizing loan payment schedule. The payment shock could be far
worse -- well over 150 percent per month after the reset -- if
interest rates in the economy rise steadily during the early years of
the mortgage. If borrowers encounter income problems or property
values flatten, they may face intolerably high monthly payments,
defaults and major losses on forced sales or foreclosures.
- Interest-only loans cut monthly
payments for three to 10 years by deferring principal reductions. At
the end of the interest-only period, the original mortgage balance on
the house remains to be paid. Monthly payments can then jump
substantially -- by 30 percent or more -- because the principal debt
must now be paid over a shortened time period.
- Piggyback loans allow buyers to
combine a standard first mortgage equal to 80 percent of the property
value with a home equity credit line or second mortgage equal to 10
percent to 20 percent of the home value. The arrangement is popular
because it allows buyers to avoid monthly private mortgage insurance
premiums, requires little or no down payment, and often qualifies
``jumbo'' loan borrowers to pay lower conventional market interest
rates on the primary mortgage.
Banks and mortgage companies say they already carefully select
customers and avoid undue risks for these loans. In a letter to
regulators March 29, the Mortgage Bankers Association said its
research indicates that its members restrict payment-option and
interest-only loans to borrowers with higher credit scores and larger
down payments.
Other lenders argue that payment-option and interest-only loans go
only to relatively sophisticated people who plan to use their monthly
payment savings for investment purposes.
Nick Nickerson, a mortgage consultant with Nations Home Funding in
Durham, N.C., says ``100 percent'' of his clients ``invest their
savings . . . and end up financially ahead. I insist that each client
have a financial planner involved and the mortgage payment savings are
direct-deposited to their investment account.''
Bottom line? If you understand all the working parts of a
payment-option loan, have sterling credit, make a big down payment and
are using your savings to make investments, you probably don't need
the financial regulators' intervention. But if you don't fit these
criteria, probably you do.
Source: MercuryNews.com
Home Copyright ©
2006 BestWebsites.com.my a collection of
Best
Websites |