Mortgage Lenders Dismiss Concerns Over Risky Loans

Mortgage Lenders Dismiss
Concerns Over Risky Loans

By Michael Schroeder
From The Wall Street Journal Online

Bank trade groups and financial institutions blasted proposals by bank regulators to rein in unconventional mortgages that allow borrowers to afford more expensive housing, dismissing concerns about risk as overblown.

Complaints poured in from groups representing federally regulated banks and thrifts, including the American Bankers Association, America's Community Bankers and the Consumer Mortgage Coalition, suggesting that the new requirements are overly restrictive and if adopted would cause many lenders to stop offering the nontraditional home loans.

One of the most aggressive mortgage lenders, Countrywide Financial Corp., said in its comment letter: "We do not believe that the risks associated with these particular loan products justify the specific and prescriptive guidance."

Late last year, federal regulators proposed more disclosure and tighter requirements for borrowers to qualify for so-called "interest only" and "payment option" adjustable-rate mortgages. The loans, which have been offered in various forms for decades, allow borrowers to exchange lower payments during an initial period for higher payments later in the payment schedule -- as opposed to the level payments of a 30-year fixed-rate mortgage.

With borrowers risking a possible doubling of monthly mortgage payments as interest rates rise, regulators raised concerns about defaults of these complex loans and whether borrowers truly understand them. The guidance recommended against allowing reduced documentation in evaluating an applicant's creditworthiness.

The loans grew in popularity over the past few years as housing prices escalated in several regions of the country, but demand has cooled recently as general interest rates have risen. Many banks, in part because of regulators' crackdown, already have stopped aggressively marketing nontraditional mortgages.

Final recommendations won't go into effect until after an internal review of comments -- probably in a few months. The comment period ended yesterday. Regulators could amend the guidance to address concerns raised by the banks, but it is unclear what changes that might involve.

The proposals were issued by the Treasury Department's Comptroller of the Currency and Office of Thrift Supervision, Federal Reserve, Federal Deposit Insurance Corp. and National Credit Union Administration.

America's Community Bankers said it supports appropriate disclosure to potential borrowers about alternative mortgage terms, but the group objected to requiring lenders to determine the "suitability" of mortgage products for the individual consumer. "We do not believe it is appropriate or possible for the lender to dictate the best mortgage products for individual consumers," the ACB letter said

The Consumer Mortgage Coalition, a trade group representing national residential mortgage companies, said in its letter that requirements should apply to all lenders including state-chartered mortgage companies, not only to federally regulated institutions.

Meanwhile, a few consumer advocacy groups, including the Greenlining Institute in Berkeley, Calif., and small banks wrote letters applauding strict guidance.

"It is very dangerous to use mortgage products that allow borrowers to buy homes more expensive than they can afford. Add this to a slowdown in the economy and the job market and we could have a serious recession," said David Stone, president of the Portales National Bank in New Mexico.

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Weekly Mortgage Rates and Activity Mostly Lackadaisical

Weekly Mortgage Rates and Activity Mostly Lackadaisical
by Mortgage News Daily

Not a lot to say about the mortgage biz for the weeks ending March 23 and 24. Fixed mortgage rates were down per Fannie Mae, up according to the Mortgage Bankers Association, and adjustable rates were up according to everybody, with one exception, overall it was hardly enough to matter.

Anyway, the details. Fannie Mae's Weekly Primary Mortgage Market Survey for the week ended March 23 indicated that the average rates for mortgages closed that week were as follows: the 30-year fixed was at 6.32 percent with fees and points of 0.6 compared to an average rate of 6.34 for the week ended March 16 with 0.7 in fees and points. The 15-year fixed averaged 5.97 percent compared to 5.98 a week earlier. Fees and points declined from 0.7 to 0.6.


The two adjustable rate products tracked by the survey showed slightly greater movement in the opposite direction. Both the 5/1 ARM and the 1-year ARM increased four basis points, averaging 5.96 percent for the 5/1 and 5.41 percent for the 1-Year. Fees and points were unchanged for the 5/1 and declined from 0.8 to 0.7 for the 1-year.

According to the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending March 24 the 30-year fixed rate mortgage average increased to 6.36 percent from 6.31 percent while points, including the origination fee, decreased from 1.13 to 1.02. The 15-year fixed rate loan was up one basis point to 6.0 percent with points increasing from 1.09 to 1.12. MBA's survey result for the 1-year ARM was more dramatic, showing an increase of 15 basis points to 5.68 percent with points also increasing from 0.88 to 0.86. Thus, at least by MBA calculations, the yield curve flattened still further with only 53 basis points separating the 1-year ARM from the 30 year fixed. Last week the differential was 63 basis points. All MBA figures are for 80 percent loan to value originations.

Loan activity was up slightly. According to the Market Composite Index, a measure of mortgage loan application volume, there was an increase of 1.2 percent on a seasonally adjusted basis from the previous week and 1.0 percent on an unadjusted basis. Compared to the same week in 2005, however, application activity dropped 15 percent.

Refinancing activity was down from 38.1 percent of all application during the week ended March 17 to 37.3 percent. Refinancing, however, increased from a 28.3 percent share of all mortgage applications to 28.7 percent.

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What Housing Bubble? Report Shows House Prices Still Soaring

Last week was a big week for news about the housing bubble and the quarterly House Price Index (HPI) report of the Office of Federal Housing Enterprise Oversight (OFHEO) released on March 1 was a good deal more optimistic about price growth than were the Census Bureau and Department of Housing and Urban Development joint report on new home sales and the National Association of Realtors existing home sales report, both issued days earlier and both showing that sales and price increases are slowing down.

The OFHEO report deals only with housing prices not sales figures, slicing and dicing this data in many ways and providing years of historical background, making it one of the most interesting of the dozen or so housing reports released monthly or quarterly. The study considers data only from same house sales or refinancing so new construction or houses with no previous mortgage activity since 1975 when the study started are not included in the survey. Wednesday's report is for the Fourth Quarter of 2005 and boldly states that housing prices have continued to climb at near record levels.


Average home prices increased 12.95 percent from the fourth quarter of 2004 through the fourth quarter of 2005. The rate during the last quarter of that period was 2.86 percent or an annualized rate of 11.4 percent. This increase during 2005 is similar to the revised increase of 12.55 percent for the year ended with the third quarter "showing no evidence of a slowdown."

While the 2.86 percent increase was lower than the 3.65 percent and 3.14 percent recorded in the second and third quarters respectively it was higher than the first quarter of 2005 and higher than in four of the previous eight quarters.

Patrick Lawler, Chief Economist for OFHEO noted that while "deceleration continues in some areas, appreciation generally is still extremely strong. Mortgage rates climbed significantly during the second half of last year, but the effect of that increase on price appreciation so far appears to be limited."

It has been a while since we looked at an OFHEO report and the change in the hot spots was notable. While Nevada and California had led in appreciation, Arizona and Florida are now on top with their yearly figures. Arizona home prices had an appreciation rate in the fourth quarter of 6.99 percent, annualized to 34.90 percent and Florida figures were 5.38 percent and 26.83 percent. California was sixth for the year at 21.07 percent and Nevada was number 11 at 18.02 percent - slightly more than half the figure one year ago. Michigan ranked 51st with an annualized rate for 2005 of 3.76 percent. Also at the bottom were Indiana, Nebraska, and Ohio.

Eighteen states had one-year appreciation rates greater than the national average, and only two, Vermont and New Mexico were at or below the national average for the quarter - further evidence that appreciation is continuing in those top tier states,

Phoenix-Mesa-Scottsdale, Arizona the top ranking Metropolitan Statistical Area (MSA) in the country with an annualized appreciation of 39.67 percent and a 7.77 rate for the quarter. Other markets with high annual appreciation are Naples-Marco Island, Florida (38.89 and 9.49 percent) Cape Coral-Fort Myers, Florida (36.19 and 7.19 percent) and St. George, Utah (35.27 and 8.21 percent). Of the twenty top MSAs in the county 10 were in Florida, four wholly or partially in Arizona and three in California. One year ago 14 were in California, four in Florida and two in Nevada.

At the bottom of the rankings was Burlington, North Carolina which showed a -2.01 percent increase for the quarter and a -1.16 for the year. Bay City, Michigan was also in the negative column for the quarter at -1.75 but managed to eke our a positive annualized rate of 0.43 percent

Of the bottom 20 MSAs, six were in Michigan and three in Ohio.

The Mountain region was the fastest appreciating area of the country at 18.79 annualized and 4.42 for the quarter with the Pacific region following closely at 18.75 and 4.05 percent. The South Atlantic which includes the coastal states from Maryland to Florida appreciated at the fastest rate since 1975 when OFHEO started collecting data. Prices there were up by 17.81 percent over the four quarters ending December 31, 2005.

OFHEO has noted in the past as in this report that refinancing has an impact on the rate of appreciation particularly, we would assume, when homeowners are requesting cash out. If only the data for purchase money mortgages is considered, the annualized rate of appreciation for the four quarters of 2005 is 10.81 compared to the total House Price Index of 12.95 percent.

OFHEO devotes a significant portion of this report to the situation in the area devastated by Hurricane Rita, analyzing purchase mortgage activity and price trends for five metropolitan areas in Louisiana and Mississippi. Those concerned with these areas can review the entire report at www.ofheo.gov.

Consumers Buy Furniture, Even Refrigerators on the Internet

By Mylene Mangalindan
From The Wall Street Journal Online

Internet-only deals are increasingly turning the Web into a virtual bargain basement for big-ticket items from snowblowers to HDTVs.

The offers are stoking a marked change in consumer behavior. For years people have embraced the practice of buying small and easily-packaged items, such as books, online. But purchasing big, costly products after merely viewing them on a computer screen has been much slower to catch on. In recent months, however, a number of retailers have noticed a significant jump in online sales of big-ticket items, like refrigerators and treadmills.

Overall, total revenue from online sales of large items, including furniture, appliances and other equipment rose 34% during the most recent pre-Christmas holiday period (Nov. 1-Dec. 25, 2005) from a year earlier, according to research firm comScore Networks. Electronics retailer Best Buy Co. says sales on its Web site in December grew more than 40% from December 2004, with appliances such as big-screen television sets selling particularly briskly. In fact, Best Buy tallied that TV sales on its Web site grew three times as fast as TV sales in its stores in 2005 from a year earlier. Companies such as Sears Holdings Corp., sporting equipment retailer Cabela's Inc., and Wal-Mart Stores Inc. now report selling hefty items like treadmills, log cabins and mattresses on their Web sites.

Some retailers believe that the increased complexity of products such as TVs and washing machines has sent more consumers to the Internet to conduct research -- and many end up placing an order while they're online. Many manufacturers and online retailers have also put better systems into place so that online orders can be shipped to the customer directly from the manufacturer. To entice consumers further, some online retailers are offering to pay the shipping costs.

Jeff Elliott, a 46-year-old building-materials project manager in New Palestine, Ind., purchased a $2,700 42-inch plasma-screen television set late last year from Best Buy's Web site, and about a year ago he bought a $1,100 Bose audio system with speakers and subwoofers online. Mr. Elliot says he bought the large items over the Web to spare himself from "breaking my back, or taking a chance of breaking something" by having the retailer deliver his big purchases to his home. He adds that if Internet sites are willing to do the "heavy lifting" with big items, he's all for it.

All of this is a boon to consumers as some retailers, eager to promote online sales of large items, offer more Internet-only specials related to big stuff. Target Corp.'s Web site is offering free shipping on select furniture and patio furniture through Saturday. J.C. Penney Co. offers discounted beds, bedroom furniture sets, patio furniture, mattresses, tables and chairs on its Web site. Home Depot offers no shipping charges on its patio furniture bought online. Best Buy currently has two offers centered on sizable items that can be found exclusively on its Web site. In one offer, Best Buy says it will give away a free DVD recorder with any $999-or-higher TV purchase. In its other offer, Best Buy promises a free 20-inch television set with the purchase of any large appliance priced at $999 or more.

When Charley Geoly, an executive recruiter, was building a home in Menlo Park, Calif., recently, he bought 3,600 pounds of copper gutter, a 37-inch and 50-inch TV, 1,000 cabinet handles and pulls, and other items on the Internet. "What the Web gives you is much broader access" to suppliers and manufacturers, he says. "I had better selection and more easy selection."

The trend differs from buying used cars and homes through the Internet, since cars and houses can't be mailed to a consumer's home. Many of the car and home sales that take place through Web sites also aren't sales at all -- real-estate and auto sites typically refer a consumer to a car dealer or real-estate agent and take a cut for making the referral. Some sites such as eBay Inc.'s eBay Motors site are exceptions, because the entire transaction, mostly used cars, takes place on the site and delivery of the used car varies widely from in-person pickup to shipment and special delivery. For the most part, actual physical sales of homes and used cars over the Web are limited.

For retailers, the payoff from selling big stuff online can be huge. The average order on Costco Wholesale Corp.'s Web site, which sells many large items such as caskets and children's playhouses, is $450, according to Ginnie Roeglin, senior vice president of e-commerce and publishing. Some retailers and analysts say that big, brand-name items carry a higher price and are more generally more profitable than small products such as socks, though that varies by product.

Some online retailers say consumer purchases of big merchandise on the Web will help fuel their growth. Amazon.com Inc. last year built several new warehouses, which Chief Executive Jeff Bezos said were constructed in part to accommodate the larger products that he anticipates the company will sell. Amazon sells jumbo items including patio furniture, mountain bikes and home gym equipment. The company declined to comment on the number of big items it sells.

Start-ups also are capitalizing on the growing appetite for buying big items online. UShip Inc., an Austin, Texas, company founded in 2003, helps buyers and sellers transport large items. The firm created a Web marketplace in the image of Internet auctioneer eBay, where individuals post an item that needs to be moved -- such as a car -- and independent truckers and freight carriers bid on listings to deliver it. UShip charges the trucker or person providing the moving service a fee of 7.9% of the accepted bid price.

Doug Dolginow, an executive at a genomics drug company in Gaithersburg, Md., recently tested out UShip. In August, Mr. Dolginow bought a 250-pound astronomy dome from another hobbyist on an astronomy Web site, but didn't know how to transport the odd-shaped 6-by-7-foot item from Boston to Maryland. Commercial shippers wanted to charge $1,000 or more, and flying to Boston to drive the dome home by U-Haul would have cost just as much, says Mr. Dolginow. So he turned to UShip, and found a mover through that site.

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