WASHINGTON — Homebuyers who feel financially squeezed by higher interest rates are increasingly being directed by realtors and mortgage brokers toward potentially riskier types of mortgages, similar to those seen before. the 2008 financial crisis, worrying some consumer advocates and industry analysts.
Among the loans available to homebuyers are variable rate mortgages, known as 2-1 redemptionswhich artificially lower the rates for the first two years, and interest only mortgages in which borrowers pay a lower monthly payment for several years by paying only the interest on the loan, according to interviews with real estate professionals, industry data, and a review of marketing materials from real estate agents and brokers in mortgages.
Either way, borrowers can end up with monthly payments that increase by hundreds of dollars a month after the introductory period, a dynamic seen in the run-up to the last housing market crash when predatory lending took their toll. home to millions of borrowers, and forcing some major financial institutions to close their doors.
Industry experts say they don’t expect the United States to see a repeat of the last mortgage crisis due to regulations put in place since, and higher standards as to who qualifies for a mortgage. They also note that variable-rate mortgages and other atypical home loans represent a much lower percentage of total mortgages than was seen during the crash of 2008.
But consumer advocates and others close to the real estate industry warn that homebuyers could still find themselves in dire financial straits when their mortgage interest rates reset and they see their monthly payments go up.
“We watch with anxiety as we see more interest in these alternative mortgage products which often seem to involve some sort of initial interest rate and the interest rate will go up,” said National Consumer Law attorney Sarah Mancini. . Center. “The scary thing about this market is that people are trying to scramble to get in and that can put individuals in a very difficult situation.”
Mancini and other consumer advocates say the trend toward riskier mortgages is particularly concerning given the overall uncertainty in the economy as economists and business leaders project unemployment will rise, interest rates will continue to rise and home sales decline. This dynamic could mean that more people are out of work and unable to refinance their homes at a lower rate or sell if necessary.
“You can get behind the eight ball if rates start to go up and your wages don’t and it’s really the disconnect here,” said Barry Zingas, who is a senior research fellow at the Consumer Federation of America and was Senior Vice President of Community Lending at Fannie Mae from 1995 to 2006. “I would advise consumers to always plan for the worst and hope for the best. But often in these circumstances people find themselves planning and hoping for the best, which is not a good recipe for success.
Rates on a standard 30-year fixed-rate mortgage have doubled since the start of the year, meaning a monthly payment on a $400,000 mortgage now costs $865 more per month than in January .
Home prices have started to decline and the trend is expected to continue, although prices are expected to remain well above their pre-pandemic levels through 2023, according to estimates from investment bank Goldman Sachs and from the rating agency. Fitch.
Nick Holeman, director of financial planning at Betterment, a robo-advisor, said he’s heard a growing sense of urgency from clients about buying a home fast. As they see rates rising, more and more of them are asking for alternatives to the 30-year fixed rate mortgage.
“Now they’re like, ‘Oh my God, higher interest rates are coming, we want to jump on it, we don’t want to miss it anymore,'” Holeman said. “I feel more and more urgency as opposed to people sitting on the sidelines to see what happens with prices.”
As rates have risen, so has the number of variable rate mortgages, which can lower the interest rate by 1-2 percentage points, cutting hundreds of dollars off the monthly payment, before to return to the market rate after 3 to 10 years. These mortgages now make up nearly 12% of all mortgages, up from around 3% a year ago, according to data from the Mortgage Bankers Association.
Yet this is a much lower share than in the run-up to the financial crisis, when they accounted for almost a third of all mortgages. Regulations enacted after the financial crisis now require lenders to make a good faith and reasonable effort to determine a borrower’s ability to repay these types of highest monthly payment loans within the first five years and provide information and clear notices about the increase in payment. .
“We shouldn’t be seeing the same level of high-volume, risky lending to people who will eventually default,” said James Gaines, research economist at Texas A&M University’s Texas Real Estate Research Center. “Lenders, regulators and the law have all conspired to hopefully not allow this kind of thing to happen.”
Linda McCoy, an Alabama mortgage broker and president of the National Association of Mortgage Brokers, said she’s seen a shift toward less traditional mortgages as she and others work with clients who are struggling to make against higher rates.
Some of the more common atypical loan programs she’s seen are ones that require little or no money, which would allow buyers to use their down payment to pay off debt and qualify for a larger mortgage. . It has also seen the return of 2-1 redemptions in which the buyer, seller or lender puts money up front to reduce the interest rate by 2 percentage points in the first year and 1 percentage point the second year.
It’s an incentive that real estate agents have promoted in dozens of Facebook posts, Youtube and ICT Tac, especially to sellers who are reluctant to lower prices. In marketing materials, mortgage brokers often suggest buyers can refinance after the two-year period, suggesting rates will drop in the near future.
But that can be a financial trap for some buyers who may be lured by lower payments and assume they’ll see increased income or be able to refinance before the two-year term is up, Mancini said, the staff attorney with the National Center for Consumer Law.
But U.S. regulators say they’re confident there won’t be a repeat of the 2008 housing crash given the regulations that have come into effect since then, and so far they don’t see lenders easing. their standards on who they give mortgages to, said Mark McArdle, deputy director of mortgage markets for the Consumer Financial Protection Bureau.
“There’s not a lot of room to do some of the risky stuff that happened in 2006, where you could sell it to an investor and they wouldn’t even know what they’re buying,” McArdle said.
Still, regulators recognize the changing dynamics in the housing and mortgage industry and are watching them closely, McArdle said. Banks and mortgage providers also say they have a new level of caution this time around, even as they struggle to keep business going amid slowing home sales.
But even with the safety nets in place, consumers still need to be aware of the risk they are taking and the assumptions they are making about what the future holds, say industry experts.
“You have to sit down and really make a rigorous, rational, unemotional assessment of your situation, and act on it,” said Gaines, an economist at Texas A&M University. “Or do you just admit you’re taking a big bet and go for it.”