A slowing housing market has put a damper on first-mortgage origination volume for the first half of the year, an industry survey released Monday shows.

First-mortgage origination volume decreased 16 percent in the first half of 2006, while strong demand continued for interest-only and payment-option mortgages, or so-called “nontraditional” mortgages, according to a survey from the Mortgage Bankers Association trade group.

The 16 percent decrease in first-mortgage originations from the second half of 2005 was driven by a 10 percent decline in purchase mortgage volume and a 22 percent decline in refinance volume, MBA said.

“In the context of a decelerating housing market and a slowing of overall mortgage originations activity, consumers continued to choose IOs (interest-only) and payment-option loans in the first half of 2006,” said Doug Duncan, chief economist and senior vice president of research and business development for the Mortgage Bankers Association, which produced the survey.

“In particular, fixed-rate IO volume increased markedly. As expected, consumers respond to changing opportunities in the marketplace, but it looks like these products serve an important need,” Duncan said.

The proliferation of nontraditional mortgages has caught the attention of banking regulators who fear that some borrowers may be at high risk of default because they may be getting loans they don’t fully understand. The Office of the Comptroller and other federal bank regulators issued new guidelines on Sept. 29 directing banks to tighten underwriting and disclosure standards for nontraditional mortgages. The guidelines instruct banks to use the fully indexed rate when analyzing a borrower’s ability to repay interest-only mortgages and payment-option, negative-amortization loans.

Key findings from the MBA survey included:

  • For first mortgages, fixed-rate loans, including interest-only loans, accounted for 49 percent of loans in the first half of 2006 compared with 47 percent in the second half of 2005.

  • Interest-only loans accounted for 26 percent of originations in the first half of 2006. However, the composition of interest-only originations changed, with fixed-rate interest-only loans accounting for 24 percent of all interest-only loans in the first half of 2006 compared with 13 percent in the second half of 2005. Payment-option mortgages (“option ARMs”) accounted for 15 percent of the dollar volume of originations in the first half of 2006, up from 8 percent in the second half of 2005.

  • First-time home buyer purchases represented almost one in three home purchases in the first half of 2006. Their average loan amount was $189,883, significantly less than the average loan amount of $236,517 for non-first-time home buyers.

  • Of the first half originations, 19 percent were for single-family attached homes, 75 percent for single-family detached homes, 1 percent for manufactured and mobile homes and 4 percent for 2-4 unit structures. About half of single-family attached home originations were for condos or cooperatives, the remainder being for other single-family attached properties such as townhouses, duplexes and rowhouses.

  • From the second half of 2005 to the first half of 2006, reverse mortgage dollar volume decreased 23 percent, with FHA’s Home Equity Conversion Mortgages (HECMs) decreasing by 16 percent and other reverse mortgages decreasing 76 percent. However, the total number of reverse mortgage loans increased 31 percent. This result was driven by a 7 percent decline in large-dollar-balance reverse mortgages, but a 32 percent increase in smaller-balance HECM loans.

The MBA survey also looked at second-mortgage originations, finding that origination volume for these mortgages increased 1 percent in the first half of 2006 compared to the second half of 2005.

Additional data found on second-mortgage originations included:

  • As with first mortgages, there was a trend towards fixed-rate loans. Data from repeater companies indicates that closed-end seconds increased 59 percent while variable-rate HELOCs increased only 3 percent. 

  • The percentage of second-mortgage originations that were closed-end increased progressively over the half to 34 percent of dollars and 42 percent of loans in the first half of 2006 from 22 percent of dollars and 32 percent of loans in the second half of 2005. 

The survey included 115 participants from almost all of the top 30 originators. During the first half of 2006, survey participants originated $640 billion in first mortgages and $175 billion in second mortgages. 

In a separate survey released Monday, MBA found that first-mortgage subprime origination volume decreased 30 percent in the first half of 2006 from the second half of 2005. The trade group said that subprime loans made up 19 percent of all originations in the first half of the year.

The average loan amount for subprime loans during the survey period was $200,167, a 7 percent increase from the second half of 2005.

Fifty-five percent of subprime originations during the first half of 2006 were for refinance purposes.

Based on loan count, one in four subprime purchase loans was made to a first-time home buyer, according to the survey.

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