The housing recovery may have already peaked but some hallmarks of the boom era are making a comeback: Adjustable-rate mortgages and reverse mortgages.
- In the fourth quarter, 31% of mortgages between $417,000 and $1 million were adjustable vs. fixed-rate, up from 22% a year earlier and the highest percentage since the third-quarter of 2008, The WSJ reports. For mortgages above $1 million, 61% were adjustable, up from 56% a year earlier.
- In 2013, $15.3 billion in reverse mortgages loans were issued -- via a government-backed program that allows seniors to borrow against the equity in their homes -- up 20% vs. 2012, Reuters reports.
Both trends have raised alarms that the "bubble" mentality of the early 2000s is making a comeback, most notably the revival of adjustable-rate mortgages (ARMs).
"The tactics are reminiscent of the period before the 2008 crisis, when ARMs exploded in popularity as banks and mortgage brokers touted their low initial rates to consumers," The WSJ reports, noting particularly the revival of interest-only loans. "The loans were last popular during the housing bubble and were fingered as a cause for many foreclosures, though the banks say they are only approving borrowers with excellent credit who can afford the principal and interest payments on such loans."
The last part of that statement is critical and one reason why my colleague Rick Newman says the rise in ARMs isn't cause for alarm -- yet.
"We're seeing the return of things that used to be mainstays in the mortgage financing business; they went away because they got abused," Newman says in the accompanying video. "Banks are not giving loans to people who don't qualify anymore."
Hopefully that is the case because banks hold ARMs on their books in greater percentage vs. fixed-rate loans, meaning they're taking on greater risk with those loans. On the flipside, banks hold them because they believe they'll be more profitable vs. fixed-rate loans, and borrowers are at risk if rates rise and they're unable to refinance or sell their home, whatever the reasons.
Of course, there are economic reasons for homeowners to take out adjustable-rate loans -- rates are much-lower than fixed-rate loans -- and most homeowners don't stay in their home for 30 years. ARMs can be particularly appealing to Americans approaching retirement age or anyone planning to sell their homes within a relatively short period of time.
Overall, the pendulum swinging away from "restrictive" credit and back toward normalcy is a positive. The risk, of course, is the pendulum swings too far toward "easy" credit and buyers feel compelled to take ARMs as home-price appreciation and higher rates have made homes far less affordable today vs. a year ago.
"A typical first-time homebuyer may be unable to afford a typical home in the near term, if mortgage rates and home prices continue to rise without sufficient increases in income," writes Orawin Velz, director of economic and strategic research at Fannie Mae.
There's a similar story in the revival of reverse mortgages: Given that 60% of Baby Boomers have less than $100,000 in retirement assets, according to Charles Schwab, the idea of letting retirees tap their homes for income makes sense, certainly for the individual homeowners.
But there are 10,000 Americans turning 65 every day and U.S. taxpayers are ultimately on the hook for these loans, which typically are structured with balloon payments upon maturity.
"When it is time to pay off the loan, the home may not be worth enough to cover the debt, potentially leaving the FHA with losses," Reuters reports. "Losses on reverse mortgages were a big reason for the agency's $1.7 billion taxpayer bailout last year - and some experts worry it could end up in similar trouble again."
In sum, it's a good thing the revival of ARMs and reverse mortgages are raising alarm bells before they become a problem vs. after.
- Investing Education
- reverse mortgages
- Adjustable-rate mortgages