NEWS: Mortgage Risks

Concerns Mount
About Mortgage Risks

Latest Data Show Move Toward
Alternative Loans Is More Pronounced
Than Previously Thought

By RUTH SIMON
Staff Reporter of THE WALL STREET JOURNAL
May 17, 2005; Page D1

In the latest sign of how frothy the housing market has become, new data show the degree to which people are stretching to buy homes in a hot housing market.

The data, from the Mortgage Bankers Association, show that adjustable-rate and interest-only mortgages accounted for nearly two-thirds of mortgage originations in the second half of last year. Both types of loans have helped fuel the strong housing market since they carry lower initial monthly payments than do fixed-rate loans, enabling borrowers to purchase more-expensive homes.

…

Though it has been clear that borrowers in high-priced markets have been gravitating to products that make homes more affordable, the shift has been greater than expected. In California, where home-price growth has been sizzling, interest-only loans accounted for 61% of the mortgages taken out to buy homes in the first two months of this year, up from 47.1% in 2004 and less than 2% in 2002, according to an analysis prepared for The Wall Street Journal by San Francisco researchers LoanPerformance, a unit of First American Corp. Just 18% of California households can afford to buy a median-price house using a conventional 30-year fixed-rate mortgage, according to a report issued this month by the California Association of Realtors.

…

The Mortgage Bankers Association conducted the survey of the interest-only and ARM share of mortgage originations in an effort to provide more accurate information about the housing market. The group's survey found that interest-only mortgages accounted for 17% of loans originated in the second half of 2004. And 46% of loans were adjustable-rate loans that don't carry an interest-only feature. The data reflect dollars lent, not the number of mortgages.

…

The MBA's weekly surveys -- which look only at application volume, not loans that are actually made -- had put the share of ARMs, including interest-only loans, at roughly 40% to 50% this year. That is up from as little as 18% of application volume in early 2003.

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