OK, here we go. Exotic mortgages, the ones where homeowners can pay only interest or an even smaller portion, are still more popular in San Diego County than they were in 2003, as of September. I got some new data today from First American LoanPerformance. Here’s the breakdown.
Let’s do interest-only mortgages first. On these loans, homeowners pay just their accrued interest for an introductory period, usually a few years, before the payments ratchet up.
Of all of the new and refinanced loans originating in the county up until the end of August, 35.2 percent were interest only. That breaks down to 47.5 percent of the new loans and 27 percent of the refinanced loans.
The popularity of interest only seems to be trending down, but hanging strong. Of all the loans originating in 2005 (the entire year), 43.9 percent were interest only. In 2004, the share was 47.8 percent. And in 2003, 24 percent of the loans were interest only.
And now, for our old friend, negative amortization loans. Those are the ones where homeowners can choose a payment even smaller than just the interest accrued. So, they’re paying some of the interest, but the rest of the interest charged gets tacked on to the lump o’ mortgage – meaning the next month, the interest is calculated on the new total. And the debt grows, until it reaches either the end of the intro period, or it has become 115 or 120 percent of the original sum. Kind of scary, and a lot of people who counted on their ability to refinance to a fixed-rate, more traditional mortgage because of property appreciation are feeling the heat as prices in some areas stay stagnant or drop.
So here’s the data. Through the end of September, 34.1 percent of all new and refinanced loans were negative amortization. The neg-am mortgages constituted 20.9 percent of the new mortgages and 42.8 percent of the refis.
In 2003, only 1.1 percent of the mortgages in the county were negative amortization. That rose to 9.9 percent in 2004 and 25 percent in 2005.
I wrote about the persisting popularity of these loans, termed “exotic” mortgages, a while ago, using the data compiled through May. In that story, I noted that 68 percent of the total loans in the first five months of the year were exotic – interest-only or negative amortization. That was about to surpass the total for the entire year of 2005, which was 69 percent.
Well, if passing such a marker could ever be something to celebrate, grab the champagne. San Diego County, during the first nine months of 2006, chose exotic mortgages 69.3 percent of the time.
Here’s the deal: the low introductory period of the exotic loans lent in recent years is about to end. The housing market is cooling considerably (see my post about dropping prices earlier this week) and a whole lot of homeowners face huge jumps in their monthly payments – and may respond by tightening their belts and spending less money elsewhere, or by foreclosing and sparking price drops in the rest of the market.
We haven’t really seen the effects of these new kinds of loans yet. Remember, neg-am mortgages made up only 1.1 percent in 2003 and 9 percent in 2004 – so if a reset period coming after three years (a typical intro period) proves tumultuous for the housing market and the greater economy, we could face some rough times when the 2005 and 2006 mortgages start resetting.