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Thursday, Feb 22, 2024

Different Needs of Borrowers Reshape Mortgage Industry

Five years ago, traditional, 30-year fixed mortgages comprised about 70 percent of Fred Arnold’s business at American Family Funding. Today, the Southern California president of the company, where most of the business comes from the San Fernando and Santa Clarita valleys, figures those loans comprise about 30 percent of the mortgage loans made. Projections that mortgage rates will rise this year aside, the business is changing. And while affordability is still the central theme in decision making for home buyers and those refinancing, these days a number of other considerations are also driving mortgage decisions. Expectations that borrowers will change jobs in a few years, a shift back to traditional families where moms stay home with the kids, and a baby boom generation preparing for retirement are all changing the types of mortgage products currently in demand. “What happens is when you get into an environment like this lenders do respond and other programs become available because it goes into a more purchase focused market or a more needs-based refi market,” said Tom Swanson, regional manager for Wells Fargo Home Mortgage in L.A. Among the new product entries at Wells is the SmartFit Home Equity Account, which offers homeowners a range of options including interest only payments for a fixed period and a revolving line of credit. Mortgage rates are expected to rise to about 6.5 percent by the end of this year, somewhat more than one percentage point from their 2004 averages, according to the Mortgage Bankers Association. In part because home prices are expected to continue to rise, though, mortgage originations are expected to remain relatively flat, at about $1.5 trillion nationally. But for home buyers and refinance customers will likely continue to shift away from the 30-year fixed variety, experts say. Though still relatively low, the higher interest rates, coupled with even a moderate rise in home prices, can boost a monthly payment enough to exceed a borrower’s budget on a 30-year, fixed mortgage deal, making variable rate mortgages much more attractive. “At this point, I am seeing less and less 30 year fixed rate loans as purchase loans,” said Allen Bond, a board member of the California Mortgage Bankers Association and president of Palos Verdes Funding. “I’m seeing more fixed for five years that go to adjustable. It’s a direct correlation to affordability.” Variable rate mortgages can help those stretching to afford a home because when interest rates are low, these mortgage rates are typically lower than an average 30-year fixed mortgage. The flip side is that these mortgage rates, adjusted monthly, can also rise to rates higher than a 30-year fixed mortgage. But lifestyle and demographic changes are also making it far more desirable for many borrowers to opt for programs that offer lower payments early on, even if the long term rates are much less attractive. That is driving a booming business in interest only mortgages and no money down mortgages. Typically an interest only loan works this way: The borrower opts to make monthly payments on the interest on the mortgage, leaving the principal unpaid, for a term of about five years. During those years, monthly payments remain well under the cost of a traditional mortgage loan. Rising values The payments will rise considerably once the principal portion of the repayment kicks in, but many of these borrowers figure that by then, they may be changing jobs and will have to sell their home anyway. They expect that rising values will yield them enough of a cushion if that happens. Another dynamic driving these loans for new originations as well as refinancing, mortgage lenders say, is an increasing interest, particularly among thirty-somethings, for one spouse to stay at home with their children. “Let’s say they work for two or three years after graduating, and then they’re getting married and having children and looking for an alternative so they can be a single income household,” said Arnold. An interest only mortgage can make home ownership affordable for these single earner households, at least through the early years of child rearing. Then, these borrowers figure, the other parent may return to work, or, if home values rise enough, they can refinance at a lower, long term rate. At the other end of the spectrum, baby boomers preparing for retirement are opting to refinance with 10-year and 15-year loans. The loans offer far lower interest rates because of their short duration and, even if the monthly payment is larger, the opportunity to retire free and clear of mortgage payments is more important at that stage of their lives. “We’re seeing that a lot,” Arnold said. “Five or six years ago we never saw a 10-year fixed rate.” Finally, there has been an upsurge in interest to mortgage products tied to the prime rate, mostly for home equity and variable first mortgage loans. FlexSaver ARM, one such program launched last year by Countrywide Home Loans Inc., includes an interest only payment option for an initial period as well as options to pay down the principal and a home equity line of credit. Payment options Well’s Smart Fit program also allows users to choose an interest only payment or a principal and interest payment. “You can take out the loan and make the interest-only option payment, but let’s say you come into a bonus or you have an inheritance, you can pay it down with no penalty,” said Swanson. “Then let’s say six months later you want to borrow that back. We give you access through an equity line of credit.” While programs like Smart Fit are particularly suited to rising interest rate environments, Swanson pointed out that banks like Wells develop their lending products with an eye to the various market segments of borrowers, rather than the revolving interest rate cycles. The difference is that as interest rates rise or fall, banks and other lenders may place their marketing emphasis on different products. Some warn that the products that look particularly attractive today like interest only payments, are not for everyone. y These interest only loans, for instance, presume that home values will continue to rise so that homeowners will still be able to take value out of their homes if they sell them. That, they say, is a risk. “A lot of consumers buying entry level homes now were not buying homes in 1990 and 1991 when we had the reversal in the last market,” said Arnold. “That’s why it’s very important that a consumer speaks with a knowledgeable broker just in case the market turns to the downside.”

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