Interest-Only Mortgages Creep Back Into the Housing Market

Interest-Only Mortgages Creep Back Into the Housing Market

Once considered the riskiest type of loan available, interest-only mortgages are making a comeback in the housing market. This time around they may not be as risky and definitely will not be as widely available. After contributing to the housing bubble and causing it to burst, interestonly loans disappeared from the mortgage market after 2007. These loans allow borrowers to pay only the interest due for the first 10 years, after which they must finally start repaying the principal of the mortgage as well. Many lenders used these loans to help homebuyers qualify for homes they really couldn’t afford. When the interest rates started adjusting on these loans, most buyers were completely unable to make the new payments and widespread foreclosure was the result. Now the second-largest home loan lender (through brokers) Michigan-based United Wholesale Mortgage has announced plans to offer interest-only loans again. They promise that the same dangers will not be in play this time. “We expect the program to be an incredibly popular option for well-informed borrowers, and in turn, a significant boom for mortgage originators,” said United Wholesale Mortgage CEO Mat Ishbia. “The purpose of the program is not to enable a consumer to afford a larger house; it’s for savvy borrowers who can regularly afford a house on a 30-year fixed mortgage, but choose the interest-only option to save additional discretionary income.” Borrower requirements will be much stricter this time around, according to UWM. Borrowers will have to have minimum FICO credit scores of 720 (the highest echelons of creditworthiness) and 20 percent down payments will be mandatory. Additionally, borrowers will have to have a 42 percent debt-to-income ratio and the loan must be underwritten at the higher, adjusted interest rates rather than at the initial low rates. Back in the housing boom, borrowers could put no money down on these loans and only be able to afford the starter rates. They were available to all homebuyers, especially those who did not understand what the terms truly meant. UWM uses these loans mostly with wealthier borrowers on jumbo loans, those who know how to utilize the upfront savings to their financial advantage. “I think it’s opening the door back to responsible lending, giving people choices,” Ishbia reiterated. “These people can afford these mortgages. They’re savvy homeowners,” said Ishbia. “We’re giving them the choice. It is no more risk to us. We actually think it’s less risk.” Still Fannie Mae and Freddie Mac believe them to be too risky to buy from lenders. Lenders making these loans must hold them on their own books or find private investors to take them. The government-backed loan corporations will not touch them. In fact, the government has called interest-only mortgages “toxic” as recently as 2013. Even though interest-only loans are still considered dangerous, the fact that they are returning at all may signal a loosening of lending standards and a general improvement in the housing market since the mortgage meltdown back in 2006.






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Desert Home Prices Still 30 Percent Below Peak

Excerpts from Desert Sun 7:15 a.m. PDT July 28, 2015 by Rosalie Murphy

Nationwide, prices for existing homes hit their pre-recession levels again in June — but in California and in the desert, prices are still well below those 2007 peaks.

Local agents say that rather than pointing to a weak housing market, those numbers show that California real estate is returning to normalcy.

The median sale price for a Coachella Valley home was $295,000 in June, in line with median prices from the past year but still 30 percent below the region’s $420,000 peak in the summer of 2007, according to data from real estate research firm CoreLogic DataQuick.

In Southern California, the median sale price in June was $442,000 — the highest price since October 2007, but still 12 percent below that year’s peak of $505,000.

Nationwide, houses fetched a median price of $236,400, surpassing the July 2006 peak of $230,400, according to the National Association of Realtors.

“California (prices) went up further and faster than the rest of the nation, and we came down a lot harder,” said Leslie Appleton, chief economist with the California Association of Realtors. “Even though national prices are back to their peak, their median is $200,000 less than we are. It’s a very different dynamic.”

Appleton cautioned that the only California counties that have seen prices return to peak levels are those surrounding San Francisco, where housing prices are notoriously high as Silicon Valley booms. She expects prices across California will return to peak levels, but more slowly — hopefully as incomes increase.

Habits have changed since the recession, too. For example, a 2015 California Association of Realtors survey says homebuyers plan to stay in their homes for 20 years on average, compared to just six years in 2013. Appleton said buyers struggle to secure financing under stricter credit rules. And the foreclosure market has largely dried up,eliminating a swath of cheap homes.

At the same time, the construction industry has been slow to recover — meaning there aren’t enough homes for many potential buyers.

“That’s why the California market is underperforming — it’s a lack of supply,” Appleton said. “We just don’t have enough inventory for sale.”

Palm Springs Real Estate PricesAs prices rise, more first-time and lower-income homebuyers struggle to purchase homes. According to the California Association of Realtors’ annual homebuyers survey, between 42 and 54 percent of buyers during the recession were first-time purchasers. During the bubble years from 2005 to 2008, less than a quarter of buyers were first-timers.

In 2015, first-timers were 40 percent of buyers surveyed in California.

“Limited inventory amidst strong demand continues to push home prices higher,” said Lawrence Yun, chief economist for the National Association of Realtors, in a statement. “Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes.”

Developers are planning several hundred new homes for the desert this year, which we hope will ease the market. For example, GHA Companies’ Genesis project in Palm Desert has started grading for 166 homes, and the Millennium development will include several hundred multifamily units in the coming years.

In the housing bubble’s development heyday, GHA president Mario Gonzales said, the company had 11 communities underway at once. Today, they’re working on around half as many.

Most Realtors feel the real estate market is coming back to a more normal market. What we are seeing is a market that’s a lot more sustainable.

Coachella Valley

June 2015 median price for all homes: $314,000

Peak median price for all homes: $420,000 in July 2007

Difference: 30 percent below peak

Southern California

June 2015: $442,000

Peak: $505,000 in March, April, May and July 2007

Difference: 12 percent below peak

Sources: CoreLogic DataQuick and the National Association of Realtors

Written by Nancy Hankin