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US sees big growth in high-risk home loans

US sees big growth in high-risk home loans
By Christopher Swann in Washington
Published: June 22 2005 23:52 / Last updated: June 22 2005 23:52

In an effort to keep up with soaring home costs, nearly one in 10 recent US homebuyers is resorting to a high-risk form of financing of the sort that was traditionally reserved for buyers of sofas and television sets.

The growth of so-called negative amortisation mortgages, in which buyers can not only avoid paying principal costs, but are not even obliged to make the full interest payments, appears to be driven by buyers willing to take on higher risks to purchase increasingly unaffordable homes.

According to LoanPerformance Inc, a mortgage data analyst, use of this high-risk mortgage product appears to have risen from just 1 per cent of loans in 2003 and 4 per cent in 2004 to about 9 per cent in the first quarter of 2005. In the past, such mortgages were used primarily by a handful of wealthy individuals or those with volatile incomes.

Interest-only mortgages have become increasingly popular with cash-stretched homebuyers. But a negative amortisation mortgage goes even further, allowing buyers to pay less than the full monthly interest costs without penalty, with the interest then being added to the overall loan. The size of the loan can therefore grow over the life of the mortgage, with buyers counting on rising home values to pay off the loan.

Ian Morris, US economist at HSBC, says that such “silly innovations” are contributing to the astonishing run-up in US house prices. “By offering these products, the industry is causing house prices to surge even further,” he said.

Lenders have devised a range of products to enable Americans to afford costlier new homes. Washington Mutual, for example, now offers a 40-year mortgage. This lowers monthly payments and offers long-term stability, but means many buyers will be paying off the loan into retirement, when their incomes are likely to be lower.

Lenders have also been offering “teaser” rates, with lower payments for the first three to six months but higher servicing costs thereafter.

“Many Americans are now less concerned by the price of a house and how much a home loan will cost over time,” said Nicolas Retsinas, head of the Joint Center for Housing Studies at Harvard University. “They are only asking how much will it cost next year.” In an effort to lower monthly payments, Americans have increasingly been shunning the traditional 30-year fixed rate mortgage.

Mortgage experts say many of the new products offered in 2004 were more sober, locking in interest rates for five to seven years. Recent offerings, however, have been more exotic and potentially dangerous.

The mortgage industry is also requiring smaller downpayments. In 1990 only 3 per cent of conventional mortgages demanded downpayments of less than 5 per cent. Now that share is about 17 per cent.


LINK: http://news.ft.com/cms/s/9584bb50-e348-11d9-b6f0-00000e2511c8.html