High risk mortgages great for Generation Xers and Ys
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Use of nontraditional loans also increased, Appleton-Young said, although changing market conditions started to give an edge to fixed-rate mortgages rather than adjustable rates.Zero down payments became more prevalent with fixed-rate mortgages, increasing to 16 percent last year from 11 percent in 2005, Appleton-Young said.
“Nontraditional mortgages are not going away. They are just a part of the landscape now,” she said.
While baby boomers facing retirement might shy away from higher-risk mortgages, she said, they can be beneficial “for younger Generation Xers and Ys entering the market with the need to stretch every dollar.”
So remember – if you’re about to retire, maybe ARM Option Payment loans aren’t for you. Maybe.
But if you’re not retiring, you can’t afford not to buy! Option Payment loans may be your only choice.
I hear that at some point in the interview for this article, Appleton-Young suddenly said: “Come with me if you want to live… in California!”
February 7th, 2007 at 11:00 pm
The quote suggests Appleton-Young should follow the advise provided by C.A.R. to it’s membership, and provide three mortgage broker referrals when a client expresses interest in an Option ARM, or really any ARM, as her qualification of which borrowers it might make sense for aren’t well considered. To the extent that Option ARMs were misused or abused during the period of high-appreciation, it’s not the Option ARM itself, but the changes in lender patterns of risk assessment, and the rise to dominance of stated income loans.
Option ARMs can, and have, been misused and abused by under-informed and/or poorly trained consumers and brokers. That doesn’t make the loan itself ill-conceived or bad, but how it’s applied can be.
February 8th, 2007 at 12:00 am
Option ARMs can, and have, been misused and abused by under-informed and/or poorly trained consumers and brokers. That doesn’t make the loan itself ill-conceived or bad, but how it’s applied can be.
That’s a very good point.
Or as the NRA (National Refi Association) would say: “Option ARMs don’t kill people – people kill people.”
February 8th, 2007 at 10:30 am
I considered that analogy, and avoided it, but it’s apt.
The critical point is, a borrower should always understand the loan they have, the risk involved, and be able to manage their finances to their benefit. Very few mortgage brokers or loan officers are financial planners, or consider the broader needs of their clients. Many people lack appropriate understanding of mortgages, and may be susceptible to pressure sales tactics.
Here’s why I disagree with Appleton-Young:
Say a Boomer, nearing retirement, who’s been in their Bay Area house for 20 years, is in an 800K house, and has 60% equity. Say, like many of them, they don’t have a ton of savings in 401K, IRAs, and no company pension. Using an Option ARM, and making minimum payments to free monthly cashflow for investment, understanding they have negative amortization, but accepting this as a reasonable way to leverage their equity, can be a good way to improve their financial security.
On the other hand, a GenX/GenY buyer, who uses an Option ARM as part of a 90 or 100% financing deal, and was qualified by a lender only on their ability to make the minimum payment, not the fully amortized payment, is taking on a LOT of risk, since they don’t have equity to leverage (therefore very little buffer to potential depreciation, or slower than expected appreciation), and may face the payment shock scenario if/when the loan reaches a re-cast point, which is at 110% of the original loan amount for many lenders. That can come much faster than expected — if it’s expected at all — depending on the terms of the loan.
“If a borrower is interested in No Interest loans, negative amortization loans, even adjustable rate financing with a low down payment, Make sure you refer that buyer to at least 3 different mortgage brokers, and steer them away from brokers that you know use creative techniques in order to bolster income and assets in order to qualify for financing.”
— David Parker, Parker & Crosland, LLP, C.A.R. Strategic Defense Attorney
And here it is on video — http://media.car.org/videos/CARexpo_Legal.wmv — Starting at 2:45 on this 3:22 minute video clip on legal issues facing Realtors.
February 8th, 2007 at 6:45 pm
“The critical point is, a borrower should always understand the loan they have, the risk involved, and be able to manage their finances to their benefit.”
I believe in motherhood and apple pie too. But in the real world I’d be happier if we could settle for the *lender* understanding the loan and the risk they have.
February 9th, 2007 at 9:57 am
Which lenders don’t get the loan or the risk they have and why?