Non Traditional Mortgage Product

Non Traditional Mortgage Product – Interest rates are starting to rise and the housing market is cooling, a combination that is putting pressure on mortgage lenders. Now, some of them are turning to bad credit left over from the last housing boom to boost their businesses.

These risky offers are classified as non-qualified loans, meaning they don’t meet the standards set by the Consumer Financial Protection Bureau. But lenders start making loans to borrowers who use them to get into potentially bigger and more expensive homes.

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Another popular loan is the adjustable rate loan, where the borrower pays only interest for a period of time before the rate resets and the principal becomes part of the payment. Another guarantee of income or “payability” of a loan for a borrower who does not have a fixed income, but is paid in a large sum of money – for example, in an investment company.

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This type of loan may be a good idea for the wealthy home buyer, but some say it’s a waste of wealth and unscrupulous brokers who pushed borrowers who still couldn’t pay it back and created the housing bubble that burst in 2008.

“All of these types of loans make anyone in business nervous,” said Tom Millon, CEO of Capital Markets Cooperative, a network of 550 small lenders and servicers.

“We’re not talking about an asset, non-performing, secured loan,” he said. “We’re talking about someone who had a fake income stream that was proven six ways before Sunday.”

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However, the slowdown in mortgage underwriting has prompted lenders to look at other loans. “We all have time on our hands because business is so slow,” he said.

Banks and mortgage providers warn that they only sell these products to qualified borrowers. But charity can be difficult to understand.

Tonaus John, Chief Operating Officer of DBC Real Estate Management, recently traveled to Pittsburgh for work. He and his wife bought a 4,000-square-foot house in suburban Franklin Park.

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“I really liked this house,” he said. “We saw it, made an offer and closed it in less than 30 days.”

He took out a home loan worth about a million dollars. It also considered conventional fixed-rate loans, but interest-only loans were half a percent lower than the 10-year fixed rate.

“I calculated that I would save $25,000 on the mortgage,” he said. At the end of 10 years, the percentage increase was set at the level of 5.25 percent. “The worst rate was 8.75 percent, and to save $25,000, I could have put that elsewhere.”

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The family’s plan, Mr. John said, is to pay principal more than interest, with the goal of reducing its mortgage more quickly than with a 30-year term loan.

“We don’t like to pay interest. “Our goal is to return it in 15-20 years.”

In many ways, this is the best plan for someone with an adjustable rate loan. But even a reliable borrower is at risk with this type of loan, says Susan M. Wachter, professor of housing and finance at the Wharton School at the University of Pennsylvania.

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One of them is the unexpected collapse of the housing market. He said it was at the height of New York’s condo market, where demand for luxury residences wasn’t keeping up with supply.

“An imbalance between supply and demand leads to large price changes, even if the entire market is not under pressure, rather than small price changes,” Dr. Wachter said. “If you need to sell to move or find a better job, or if your financial situation changes, having an equity loan will put you in a better position.”

Of course, this is possible with a 30-year fixed mortgage, but the monthly payments help pay off the principal, which increases the homeowner’s equity.

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Another concern, Dr. Wachter said, is that home prices are rising so quickly that mortgages may be the only way to buy a home in hot markets like San Francisco. For example, if a large portion of the borrower’s income comes from company stock or annual bonuses, then it seems reasonable to keep the monthly payment low over time.

But when the local economy slows or the housing market collapses, only interested buyers can be hit hard if they don’t try to pay down the principal.

“In markets like San Francisco, the correction will be very difficult,” Dr. Wachter said. “These are the structures with the most volatility and the most price risk. Inflation will be high due to the assumption that prices will continue to rise. “

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And not paying the principal in the first interest period shortens the amortization period of the loan, says Richard K., professor of housing at the University of Southern California. Green.

In other words, instead of paying off the loan over 30 years, the borrower pays it off over 20 or 25 years, increasing the amount of payments after the interest period ends.

Both professors noted that depending on how the buyer feels about the home, an interest-only loan may be a better option.

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“If we’re talking about independent affluent households and they’re thinking about money management and they really want to take on more debt, that’s the way to manage it by looking at the whole portfolio,” Dr Wachter said.

Peter Boomer, director of mortgages at PNC Bank, is underwriting the loan for Mr.

He suggested three types of borrowers for whom these loans work best: those who don’t plan to stay in their home for the full 30 years, those who include a bonus equal to their income, and those looking for a mortgage. as another form of debt in their portfolio.

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Borrowers test whether they can afford a 30-year term loan on the same home and are often asked to put 25 or 30 percent down on the purchase price if they choose one of the options. valid mortgage.

He added that PNC conducts individual assessments on borrowers. “It’s not just someone walking into this house,” he said.

The risk of changing personal financial circumstances can only affect the ability to repay the loan. But Dr. Green said the biggest problem was the very low borrowers, like middle-class buyers, who were used to fuel the housing crash.

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“In the past, the probability of the explosion was primarily a loan to a married couple making $40,000 a year who bought a $500,000 home in Bakersfield,” he said. “It’s not the payment shock that blew them away. These people were left out and could not get a house with a regular loan. They were the first to lose their jobs.”

Today, however, even qualified borrowers must be aware of the dangers of loans. After the first interest period resets, the payment can go up to 50 percent, and some people can’t afford that, Dr. Green says.

Borrowers may be able to refinance at a lower rate, but with rising interest rates, they need to understand that this may not be possible.

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“I think you have to be a qualified investor to get into a product, just like you have to be in private equity,” Dr. Green said. “For a first-time home buyer, I say stay away.”

A copy of this article appears in the New York edition of the issue, Section B, page 5, entitled: “Recovery of Subprime Loans.” Order Reprints | Today’s page Register Jumbo mortgages and conventional mortgages are two types of mortgages that borrowers use to purchase a home. Both loans require homeowners to meet certain requirements, including minimum credit scores, income, ability to pay, and down payments.

Both are mortgages issued and underwritten by private sector lenders, as opposed to government agencies such as the Federal Housing Administration (FHA), the US Department of Veterans Affairs (VA), or the USDA Rural Housing Service (RHS).

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Although they may serve the same purpose (protecting a specific area), these two security products differ in many ways. Jumbo loans are used to purchase high-priced real estate – often in the millions of dollars. A conventional mortgage, on the other hand, is smaller and more suited to the needs of the average consumer. They may be purchased by a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac.

Jumbo mortgages, as their name suggests, are loans for financing high-value real estate. Basically, they involve a lot of money: about $650,000

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