CHARLOTTE, N.C. — If the real estate loan industry were a fashion runway, the latest spring line-up would feature 40- and 50-year mortgages with a splash of no-interest and option adjustable-rate loans.
These new types of mortgages are fashionable on many of today’s home buyers, but what will they look like after going through a wash cycle of higher interest rates and receding home-price growth?
Statewide Bankcorp, a lender based in Rancho Cucamonga, Calif., in March started offering a 50-year mortgage loan to California borrowers, generating a lot of industry buzz and stirring debate about potential risk for rising foreclosures among nontraditional mortgage borrowers.
“The mortgage business is becoming a fashion trend,” said Anthony Hsieh, president of online home-lending network LendingTree.com, referring to the recent launch of 40-year and 50-year fixed-rate mortgages and other new loan products. It’s as if companies are rolling out the new styles each season to get the attention of consumers, he said.
The rise of the 40- and 50-year mortgage follows a round of other nontraditional loan products such as interest-only and certain adjustable-rate mortgages. These products have become popular over the last few years as soaring home prices made it more difficult for consumers to afford homes and though such loans often served the purpose, they have come under criticism from federal officials including then-Federal Reserve Chair Alan Greenspan and the Comptroller of the Currency.
New mortgage products, though riskier than traditional ones, aren’t always a bad thing, said Hsieh, who also serves as CEO of LendingTree Loans. “It’s no longer a one-size-fits-all mortgage product out there,” he said. “The key issue is that the consumer needs to slow down and understand which is the right mortgage.”
High home prices have dampened affordability in a lot of markets and in some cases, buyers wouldn’t have been able to purchase homes without alternatives to the traditional 15-year and 30-year fixed-rate mortgages.
The market has “come a long way,” said Hsieh of the days when consumers had no choice but to put 20 percent down and take out a fixed long-term mortgage to become homeowners.
Two months ago, Bank of America started offering a 40-year mortgage, according to Floyd Robinson, Bank of America’s consumer real estate president, who said he expects to see a no-fee mortgage next, which could save consumers thousands of dollars at closing.
Asked what a lender’s incentive is to not underwrite a risky loan, Robinson said that a lender’s initial decision is to keep people in properties long-term and if the lender plans to sell the mortgage then risk factor is an important consideration.
C.D. Davies, president, Wachovia Mortgage, said, “Reputation is key to us with customers,” and with investors, reputation is vital because not maintaining high standards will impact the mortgage company in the future.
Investors will pay more for mortgages underwritten by lending companies that have a lower loan delinquency rate, he said.
Another part of today’s mortgage fashion is offering styles that fit minority home buyers. “Fifty-eight percent of our new deposit customers have FICOs of 660 or less,” said Bank of America’s Robinson. “If we’re going to serve consumers it’s imperative we support the growth of (loan) products in minority and low- to moderate-income areas.”
LendingTree’s Hsieh noted the cultural divide over debt in the immigrant market. “We love debt in America more so than any other country.” For immigrants, he said, it takes time to get used to that.
“I think the mortgage industry overall is going in the right direction” serving this segment, said Hsieh, and there will be more opportunity for immigrants to come into the housing marketplace in the next 5-10 years.
Davies said Wachovia has spent a lot of time looking at special loan products and additional employee training as part of its plan to tap into the minority home buyer market.