Yo, yo, yo. Americans’ mortgage choices are getting riskier and riskier. A few minutes ago the Mortgage Bankers Association announced the results of a survey of borrowers from the first half of 2005. (A little old, but I guess it takes awhile to compile the numbers.)
Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren’t risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why? Partly, it seems, because more people chose option ARMs. Those, of course, are specialty ARMs that give you the option to pay even less than the monthly interest you owe. The unpaid interest gets added onto your principal (negative amortization). Option ARMs climbed from 17% to 23% of first-mortgage originations.
Then there are alt-A loans—the ones you get when you don’t submit all the documentation that would be required to qualify for a straight loan. Those are usually chosen by people who have unsteady sources of income—or simply have too little documented income to qualify for a straight loan for the house they want to buy. The MBA says alt-A loans’ share rose from 8% to 11%.
The mortgage bankers’ press release contains a quote from their chief economist, Douglas Duncan: ” … borrowers need to be vigilant to ensure that they prudently measure and manage the additional risk of these new products.”
Ain’t that the truth.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.