Randolph Kinney
Elite Member
- Joined
- Apr 7, 2005
- Professional Status
- Retired Appraiser
- State
- North Carolina
Lenders Seek Ways To Grow Customer Base
Post-Housing Boom, Lenders Seek Ways To Grow Customer Base
BY DAVID DEVOSS
FOR INVESTOR'S BUSINESS DAILY
Posted 8/24/2006
Sixty-nine percent of American adults have mortgages, up from 64% in 1990.
Now that the bloom's fading from the housing boom, lenders are probing how to boost home ownership further, thus their business.
Some risk is inherent in their strategy, which entails offering more exotic and longer loans, and appealing to new buyers.
Minorities will account for nearly 65% of these first-time home buyers. Indebted college graduates, single parents and young marrieds just starting to build equity will comprise much of the balance. Freddie Mac says $6 trillion will be needed to finance these loans.
"There's money to be made by targeting this segment of the market because it is underserved and growing," said Lorrie Blevins, Freddie Mac's western region manager for housing and community investments.
That's one tonic to mortgage lenders, who have been coping with the slowest pace of mortgage application activity since 2002 and with more competitors in their industry grappling for borrower business.
Finding New Owners
Prospects for raising the incidence of U.S. home ownership look good partly because of potential in African-American and Hispanic markets and because of an influx of immigrants intent on buying, says Countrywide Financial Chief Executive Angelo Mozilo.
Agencies such as Freddie Mac, Fannie Mae (FNM) and the Federal Housing Administration want to create tax-paying property owners and are making money available. And moves are afoot to broaden loan-making potential. A measure to raise FHA loan ceilings, extend loan lengths and drop down payment requirements from 3% to zero passed the House, and went to the Senate in June.
However, extending credit more liberally raises the specter of delinquency and default, already an industry worry. More buyers just barely making it could end up in a bind as adjustable rate mortgages reset at higher rates.
Regulators Take A Look
Banking regulators have cast a wary eye, and they're expected to soon put out guidance on nontraditional mortgage issuance. The proposed guidance makes it clear nontraditional mortgage products are perfectly appropriate if underwritten properly with meaningful disclosures, according to Comptroller of the Currency John Dugan.
Credit's more plentiful than it once was. Last year nonprime loan originations — those based on middling credit scores — comprised 21% of the market vs. about 5% a decade ago. Such loans had a foreclosure rate of 3.3% in the fourth quarter of 2005, while loans to borrowers with better credit, the prime market, had a foreclosure rate of 0.4%. However, lower scorers pay more for loans because they're higher risk. Also, the lending industry considers itself better equipped to manage risk, thanks partly to new high-tech underwriting tools.
Today's wide range of mortgage choices is broadening the ranks of homeowners by taming monthly payments and requiring little or no down payment. For instance, lenders market 40- and even 50-year mortgages. Forty-year loans have been around for decades, but lenders are offering them more broadly and home buyers are asking for them in significant numbers.
Also, ARMs appear in greater variety than they once did. For instance, there's the pay option loan, which lets buyers choose what to shell out each month: a partial interest payment, a full interest payment or payment of principal and interest.
It's Different Today
Times have changed drastically in the world of housing. Sixty years ago, following World War II, buying a new home was relatively easy. The Veterans Administration and the FHA guaranteed most mortgages for first-time home buyers. A young married couple with a 20% down payment could borrow the balance of the purchase price at the prime rate plus one or two points, a point equaling 1% of the loan amount. Banking was so simple, it jokingly was called the 3-6-3 business: Bankers paid 3% interest on deposits, loaned money at 6% and hit the links at 3 p.m. when their offices closed.
Programs financed by Washington and offered through local housing authorities let a person buy a house with little or no money down. But the borrower must decide if the loan being offered is appropriate to his circumstances.
If cash is tight, a pay option loan lets a borrower skip a portion of his monthly mortgage payment and add the unpaid balance onto the end of his loan.
Miss too many payments, and a negative amortization situation develops in which you may end up owing more than the home's purchase price.
An interest-only loan allows for low monthly payments initially because repayment of principal is deferred for an agreed-upon number of years. The downside is that you build no equity for the first couple of years despite making monthly payments.
Post-Housing Boom, Lenders Seek Ways To Grow Customer Base
BY DAVID DEVOSS
FOR INVESTOR'S BUSINESS DAILY
Posted 8/24/2006
Sixty-nine percent of American adults have mortgages, up from 64% in 1990.
Now that the bloom's fading from the housing boom, lenders are probing how to boost home ownership further, thus their business.
Some risk is inherent in their strategy, which entails offering more exotic and longer loans, and appealing to new buyers.
Minorities will account for nearly 65% of these first-time home buyers. Indebted college graduates, single parents and young marrieds just starting to build equity will comprise much of the balance. Freddie Mac says $6 trillion will be needed to finance these loans.
"There's money to be made by targeting this segment of the market because it is underserved and growing," said Lorrie Blevins, Freddie Mac's western region manager for housing and community investments.
That's one tonic to mortgage lenders, who have been coping with the slowest pace of mortgage application activity since 2002 and with more competitors in their industry grappling for borrower business.
Finding New Owners
Prospects for raising the incidence of U.S. home ownership look good partly because of potential in African-American and Hispanic markets and because of an influx of immigrants intent on buying, says Countrywide Financial Chief Executive Angelo Mozilo.
Agencies such as Freddie Mac, Fannie Mae (FNM) and the Federal Housing Administration want to create tax-paying property owners and are making money available. And moves are afoot to broaden loan-making potential. A measure to raise FHA loan ceilings, extend loan lengths and drop down payment requirements from 3% to zero passed the House, and went to the Senate in June.
However, extending credit more liberally raises the specter of delinquency and default, already an industry worry. More buyers just barely making it could end up in a bind as adjustable rate mortgages reset at higher rates.
Regulators Take A Look
Banking regulators have cast a wary eye, and they're expected to soon put out guidance on nontraditional mortgage issuance. The proposed guidance makes it clear nontraditional mortgage products are perfectly appropriate if underwritten properly with meaningful disclosures, according to Comptroller of the Currency John Dugan.
Credit's more plentiful than it once was. Last year nonprime loan originations — those based on middling credit scores — comprised 21% of the market vs. about 5% a decade ago. Such loans had a foreclosure rate of 3.3% in the fourth quarter of 2005, while loans to borrowers with better credit, the prime market, had a foreclosure rate of 0.4%. However, lower scorers pay more for loans because they're higher risk. Also, the lending industry considers itself better equipped to manage risk, thanks partly to new high-tech underwriting tools.
Today's wide range of mortgage choices is broadening the ranks of homeowners by taming monthly payments and requiring little or no down payment. For instance, lenders market 40- and even 50-year mortgages. Forty-year loans have been around for decades, but lenders are offering them more broadly and home buyers are asking for them in significant numbers.
Also, ARMs appear in greater variety than they once did. For instance, there's the pay option loan, which lets buyers choose what to shell out each month: a partial interest payment, a full interest payment or payment of principal and interest.
It's Different Today
Times have changed drastically in the world of housing. Sixty years ago, following World War II, buying a new home was relatively easy. The Veterans Administration and the FHA guaranteed most mortgages for first-time home buyers. A young married couple with a 20% down payment could borrow the balance of the purchase price at the prime rate plus one or two points, a point equaling 1% of the loan amount. Banking was so simple, it jokingly was called the 3-6-3 business: Bankers paid 3% interest on deposits, loaned money at 6% and hit the links at 3 p.m. when their offices closed.
Programs financed by Washington and offered through local housing authorities let a person buy a house with little or no money down. But the borrower must decide if the loan being offered is appropriate to his circumstances.
If cash is tight, a pay option loan lets a borrower skip a portion of his monthly mortgage payment and add the unpaid balance onto the end of his loan.
Miss too many payments, and a negative amortization situation develops in which you may end up owing more than the home's purchase price.
An interest-only loan allows for low monthly payments initially because repayment of principal is deferred for an agreed-upon number of years. The downside is that you build no equity for the first couple of years despite making monthly payments.
