Risky A-loans becoming more popular
By Justin Hunter
As the housing
market continues its downslide, so does the demand
for mortgage loans.
Mortgage rates have recently started to fall back again,
but after 17 consecutive increases, many potential borrowers
are considering other mortgage options.
In come nontraditional, “risky” loans. These
loan options offer lower rates or lower monthly payments,
usually with longer terms or higher fees after a predetermined
time period (usually about five years).
The September 5, 2006 article, “Lenders, Analysts
Don't See Risk In 'Risky' Loans,”
by Broderick Perkins, columnist for Realty Times, explains
how lenders are not worried about the future affects
of nontraditional 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.”
The declining home sales and home sale prices have prompted
lenders to be less critical in the mortgage underwriting
process unless it is a “no-doc” loan, which
does not require specific work history, etc. By not
scrutinizing credit checks and backgrounds as strictly,
lenders have opened up a few more origination opportunities.
“‘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.”
An Alt-A loan is the alternative offered loan for S&Ps
A-rated borrowers.
Offering these loans to borrowers with top notch credit
offsets the risk of not requiring verification of job,
income or financial assets, which speeds up the origination
process.
“‘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,"
said S&Ps primary analyst Jeff Watson.
These Alt-A loans offers several benefits such as: they
have a loan-to-value ratio of over 80 percent, without
requiring primary mortgage insurance. These loans are
also offered to borrowers who are temporary resident
aliens and can be secured by a “non-owner”
occupied property. They also do not require a borrower’s
expenses be under a specified 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.”
The most popular Alt-A loans are adjustable rate mortgages
(ARMs), which allow them to fluctuate as the market
does and closely compare to “traditional”
rates.
“‘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.
These risky loans offer many benefits but are nontraditional
so you should make sure that you understand all the
terms and stipulations before signing.
Loans with lower
rates may ultimately have longer terms or higher
adjustable rates after a predetermine time.