More Option ARMs and Alt-A Loans

Peter Coy

Yo, yo, yo. Americans' mortgage choices are getting riskier and riskier. A few minutes ago the Mortgage Bankers Association announced the results of a survey of borrowers from the first half of 2005. (A little old, but I guess it takes awhile to compile the numbers.)

Ordinary ARM loans, which are riskier than fixed-rate loans, apparently aren't risky enough for many borrowers. The MBA says that their market share fell from 46% in the second half of 2004 to 36% in the first half of 2005. Why? Partly, it seems, because more people chose option ARMs. Those, of course, are specialty ARMs that give you the option to pay even less than the monthly interest you owe. The unpaid interest gets added onto your principal (negative amortization). Option ARMs climbed from 17% to 23% of first-mortgage originations.

Then there are alt-A loans--the ones you get when you don't submit all the documentation that would be required to qualify for a straight loan. Those are usually chosen by people who have unsteady sources of income--or simply have too little documented income to qualify for a straight loan for the house they want to buy. The MBA says alt-A loans' share rose from 8% to 11%.

The mortgage bankers' press release contains a quote from their chief economist, Douglas Duncan: " ... borrowers need to be vigilant to ensure that they prudently measure and manage the additional risk of these new products."

Ain't that the truth.

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