Tuesday, February 06, 2007 | Last week, Will Carless wrote an article concerning bonuses paid by lenders to mortgage brokers in exchange for the latter writing profitable, high-interest loans. The ethical nuances of this matter are certainly interesting. But as readers of this column know, I am a huge nerd, so I would like to dig a little further into the numbers that Will discussed.

Will provided the following example in order to demonstrate the euphemistically-named “yield-spread premium” in action.

In a typical transaction, a buyer might finance $500,000 at 6.5 percent and pay the mortgage broker a $5,000 fee for putting the loan together. Alternatively, the buyer could opt out of paying the fee in exchange for a 7 percent rate on the loan.

In the latter case, buyer saves $5,000 up front — but at what cost? That extra 0.5 percent on the mortgage rate translates to a monthly payment increase of $166.17. That’s almost $2,000 per year, every year, for the entire life of the loan. And now that people have stopped moving or refinancing their mortgages every year, that could really start to add up.

It’s not a very good trade-off. At least, not from the buyer’s perspective. Nevertheless, it would seem that many buyers willingingly choose this route: higher rates but no fees.

Knowing participation in this practice is an example, albeit a rather dramatic one, of the “buy-now, pay-later” approach to homebuying that has been so prevalent of late.

I recently devoted an entire column to another outcome of the same underlying attitude: that 35 percent of 2005 homebuyers made no down payment on their home purchases.

It’s become popular to wriggle out of fees, down payments, and even monthly mortgage payments. Interest-only loans, which accounted for 50 percent of all loans taken out in San Diego in 2004, allow borrowers to put off paying down their principal — the amount that was borrowed — and to pay only loan interest for a certain period of time.

More recently, “payment-option ARMs” and their negative-amortization brethren have taken San Diego by storm. These mortgages take the interest-only concept a step further, and actually allow people to pay only a portion of their accrued interest each month. The remaining unpaid interest is added to the loan principal so that the amount owed actually grows over time instead of shrinking as with typical mortgages.

In short, there is a strong tendency to use the loan to pay for everything — down payments, fees, kitchen upgrades, the cars that developers are giving away to induce people to buy their converted condos — and then to put off paying down that loan for as long as possible.

This phenomenon is certainly not exclusive to San Diego. Exotic mortgages are popular nationwide. More generally speaking, saving is out and spending is in. The national ratio of household debt to income is at a record high, and the household savings rate recently went negative for the first time since the Great Depression.

I am not passing moral judgement, nor am I waxing nostalgic about the days when our pathologically thrifty, Depression-surviving grandparents had the fiscal reigns. My intent here is simply to describe what is taking place. It is, as they say, what it is.

That said, it’s reasonable to be concerned about the outcome of all this borrowing, both on our national economy and on the local housing market. As with the mortgage yield-spread premium discussed above, the price that people are willing to accept in the future in exchange for the right to pay nothing now seems inordinately steep.

Meanwhile, people aren’t saving any money, income growth is barely keeping pace with inflation, and the home price appreciation moonshot seems finally to have stalled. Which leaves the question: where will people get the money when the bills finally come due?

We’ve done a bang-up job during the “buy-now” phase. It remains to be seen how well we do when we enter the “pay-later” term.

Rich Toscano is an independent real estate analyst residing in Hillcrest and working in La Jolla. He writes extensively about San Diego housing at  Piggington’s Econo-Almanac.

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