Alt-A trends in 2006: One lender's perspectiveJoe Amorosohousing bubble, alt-A, interest-only
Is there a housing bubble? If so, when and to what extent should
we expect it to deflate? Have we seen the end of rate increases
from the Federal Reserve? These are the questions on the minds of
most originators these days.
While I can't answer those questions with great authority, I can
say with certainty that the market for alt-A mortgages will
continue to grow and evolve in 2006 - even though economists from
the Mortgage Bankers Association of America and other experts have
predicted as much as a 25 percent reduction in total originations
for purchase and refinance loans this year.
On the surface it seems counterintuitive, but alt-A continues to
gain a greater share of overall originations year after year. In
fact, during the first three quarters of 2005, alt-A loans rose 4.5
percentage points from the same period in 2004 to capture 11
percent of total mortgage production, according to American Banker,
Jan. 9, 2006. I expect that trend to continue as those in our
industry who specialize in alt-A production, such as Countrywide,
IndyMac and Opteum, continue to develop compelling new products for
investors and consumers.
New borrowers
Alt-A is no longer the exclusive domain of borrowers who are
self-employed, such as independent consultants, physicians and
others. The pricing is simply so close these days that the line
between typical alt-A borrowers and conventional prime borrowers
continues to thin. Alt-A products now entice traditional "A" paper
borrowers who benefit from the products' loan-to-value ratio (LTV)
and documentation flexibilities.
We're seeing a new type of borrower embracing alt-A. For
example, a schoolteacher who earns $60,000 a year and tutors during
the summer or refinishes furniture for an additional $20,000 might
be a perfect candidate. Sometimes that additional alternative
income is not documented or there are greater challenges with
verifying it. That's where alt-A products become very attractive
options.
Product trends
In this interest rate environment, we see a trend toward fixed-rate
mortgages. This is a trend I would expect to continue as
uncertainty in the economy prevails.
Another trend in production is the interest-only loan. More and
more often, consumers are looking at the interest-only option as a
way to manage cash flow, rather than as a tool to afford a more
expensive home. This is obviously the original idea behind the
products intended use. How can we make that assumption?
Most borrowers choosing the interest-only product are not using
the interest-only option to qualify for the loan. They pay down
their principal balances at nearly the same rate as those whose
loans are fully amortizing. When they have extra cash on hand, they
use it to pay down their principal balance. For example,
interest-only loans can be ideal for commissioned salespeople with
larger incomes who can make a substantial payment at the end of the
year or can make consistent principal reduction payments.
It's important to note that most of these borrowers are of
better credit quality as well. We're seeing higher average FICO
scores and lower LTVs among all alt-A borrowers, especially those
choosing interest-only options.
Furthermore, with federal regulators now considering tougher
underwriting guidance on interest-only and payment-option
adjustable-rate mortgages, education is more important than ever,
especially for point-of-sale people/loan officers in contact with
consumers.
Choice is king
As with any product or service, consumers want a greater number of
choices. Mortgages are no exception. Borrowers want to evaluate the
full range of financing options - and understand how those options
affect their monthly paymentsbefore making their final selections.
Its a fact of life that consumers today are far more educated and
savvy than those of the past.
In 2005, a fixed-rate, 40-year term product was introduced that
is just beginning to gain traction among borrowers. This year, the
industry has started to see an adjustable-rate 40-year option. Both
options are fully amortizing and balloon in 30 years. This product
is ideal for borrowers who want something in the middle. They want
to reduce their monthly principal or are leery of interest-only
products but still want a lower payment option. The 40-year payment
fits the bill because it tends to be about halfway between a
30-year fixed payment and an interest-only payment. It will be
interesting to see if this product gains long-term popularity.
I do anticipate modest rate increases in 2006 and that housing
prices in most areas will remain relatively stable. Therefore,
expect to see continued interest in products that minimize payments
while still being comfortable for borrowers. Educated borrowers
understand the effects of rate increases and the more exotic loan
programs with serious down-the-road consequences. Todays borrower
is striving to customize a program that works for him and his
specific situation.
The investor perspective
At Opteum, we've seen strong performance for our investors from our
alt-A securitizations, and we expect more of the same. While many
predict this year will prove to be somewhat conservative across the
board, it bodes particularly well for alt-A when both the secondary
market and the consumer market equally embrace the product. The
demise of any product is when it falls out of favor for either
group. I feel its a positive indicator that the alt-A industry will
continue to thrive and expand throughout 2006.
Joe Amoroso is senior vice president of Opteum Financial Services. He may
be reached by e-mail at
[email protected].
