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].
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