Magazine article Mortgage Banking

Setting the Record Straight

Magazine article Mortgage Banking

Setting the Record Straight

Article excerpt

THE HOUSING MARKET CONTINUES TO sizzle. According to the National Association of Realtors[R] (NAR), Chicago, existing-home sales hit a record high in April, defying expectations of a modest slowing trend in 2005. Interest rates even dipped a little, combining with a stronger job market and greater consumer confidence, to further stimulate housing statistics. According to Freddie Mac, housing has continued to buoy the economy, accounting for approximately 20 percent of gross domestic product (GDP) growth in the first quarter of 2005.

Given this scenario, some of the recent articles in some of our most prestigious newspapers and magazines may seem hard to believe. The focus today is on "doom and gloom" and the "housing bubble." Never mind that many people still want to buy homes. Over the last few months, the media have put a negative spin on a very positive segment of the U.S. economy--both the housing market and the mortgage products available to help more individuals realize the American dream.

If you have ever worked with a first-time homebuyer, the look in the eyes of a potential buyer radiates his or her desire to own a home. That is what makes our job so rewarding. However, newspapers and television commentary are criticizing the mortgage banking industry for increased use of adjustable-rate, interest-only and subprime products. According to San Francisco-based LoanPerformance, a firm that tracks data from many U.S. lending institutions, about 23 percent of homebuyers are using interest-only mortgages. According to the Mortgage Bankers Association (MBA), 63 percent of home-buyers are selecting adjustable-rate mortgages (ARMs) and interest-only mortgages.

Some economists are concerned that these loans might hurt consumers and have a negative effect on the economy. The worry comes from an anticipated drop in home values as well as an increase in interest rates, possibly raising the specter of foreclosure if borrowers are no longer able to make their monthly mortgage payments. Accusations fly that our industry is preying on today's homebuyers by pushing loans that are bad for borrowers. Even NAR got into the act by calling us "trash lenders."

So what is the real story? Is the mortgage industry taking advantage of consumers? The answer is a resounding "no." Recently I had an opportunity to meet with the press at MBA's National Secondary Market Conference. After fielding a few questions, I realized that there was a great information gap out there. Many of the reporters covering our industry did not know, for example, that ARMs have been around for 30 years.

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In speaking with the press, I also asked them how much they knew about these alternative mortgage products. Many did not realize that ARMs have both periodic caps and lifetime caps, so that borrowers are not subject to significant rate jumps. Many of the reporters who cover our industry did not know that borrowers are often underwritten at an interest rate that is 100 percent to 200 percent higher than the mortgage's start rate. The mortgage industry has incorporated these "safety" features to make sure that borrowers can truly qualify for these loans.

Another point that the press may not realize is that, in most cases, payment of the principal portion of an interest-only mortgage does not begin for 10 years. While payments will go up significantly at that point in time, a borrowers' income has 10 years to catch up with the demands of that new payment.

Professionals in our business want repeat customers and do not push products that would hurt their clients. …

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