Lenders Don’t See Risk with Non-Traditional Florida Home Mortgage Products
There’s been a lot made about the rate shock many owners are - or soon will be - undergoing as a result of resetting adjustable Florida home loans. One study, however, should be encouraging for buyers thinking of using exotic mortgage products.
While alterative national and Florida home loan volumes reached record levels in the second quarter Standard & Poor’s “Trends in U.S. Residential Mortgage Products: Alt-A Sector Second-Quarter 2006,” didn’t show an influx of foreclosures or defaults to go along with this data.
“This growth is a result of the dramatic increase in the popularity of affordability products during the first half of 2006,” said S&Ps primary credit analyst Jeff Watson.
In the S&P lexicon, “Alt-A loans” are alternative loans for A-rated borrowers. They’re reserved for borrowers with top-notch credit, a condition that helps offset the risk related to the fact that the loans require NO verification of a job, income or assets. Most of these are more commonly referred to as no-doc Florida mortgage loans. They help lenders speed through loan applications to out pace competitors when there’s high mortgage demand.
“Instead of taking five days to qualify a borrower it might take one or two days. It also saves them (lenders) a little money to speed it through and they can issue loans quicker than competitors,” Watson added.
What does an “Alt-A” Florida home mortgage entail?
Adam Tempkin, spokesman for S&P’s Structured Finance division said the Alt-A batch of loans include:
- Loans with a loan-to-value ratio in excess of 80 percent, but don’t require primary mortgage insurance.
- Loans to borrowers who are temporary resident aliens.
- Loans secured by a non-owner occupied property.
- A Florida home mortgage that doesn’t require the borrower’s expenses be less than a specified percentage of income.
Experts had feared such loans and others would make home owners carrying them to be the first casualties during a market down turn. But while Florida foreclosures and defaults in some areas have begun to rise, they remain below historic levels. The continued growth in Alt-A loans, therefore, indicates the risk is manageable … so far.
In addition to helping lenders speed up the loan process, Alt-A loans also give buyers more leverage because the most popular are adjustable rate mortgages (ARMs) that come with optional payments, interest-only payments, and second mortgages. Such terms allow buyers to achieve home ownership with little up front cash and smaller monthly Florida mortgage payments.
Option ARMs and interest-only loans comprised 77 percent of the volume in the second quarter this year, up from 61 percent during the second quarter last year.
“Option ARMs are at the forefront of this trend, as they far outstrip other affordability products in popularity among prime credit borrowers. In fact, their popularity should further accelerate, as new hybrid option ARM products become more widely available during the second half of 2006,” Watson said.
