1 percent loans

Will California home buyers find it more difficult next year to qualify for mortgages that allow them to make low monthly payments through "negative amortization?"
Yes -- especially if federal financial regulators force banks and their mortgage subsidiaries to sharply restrict their marketing and origination of negative amortization loans in the coming weeks.
Comments by a top Treasury official last week offered strong hints that new restrictions are likely to be imposed, probably before the end of this month. Comptroller of the Currency John C. Dugan singled out negative amortization loans as a major concern of the Treasury Dept. and other financial regulators. Negative amortization refers to the build-up of principal debt, rather than reduction, that is permitted under various "affordability" loan products used in high-cost areas of the West and East coasts.
Payment-option loans, for example, carry low monthly payments for up to five years because of deferral of principal and interest. Under such plans, a home buyer might start out with a $450,000 initial principal balance on the mortgage, but through payment deferrals have a balance of $475,000 or even $500,000 five years later.
Dugan said regulators are especially concerned about negative amortization loans in real estate markets entering down cycles: "If real estate prices decline -- and there already is evidence of softening in some markets -- these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties."
Dugan and other regulators are also worried that many home purchasers using negative amortization plans may not fully comprehend the impending "payment shocks" that will confront them if they can't refinance and have to stick with their "affordability" mortgages.
"Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a large mortgage?" asked Dugan rhetorically.
Dugan's comments carry significant weight. Not only does his unit within the Treasury Dept. oversee all national banks and their mortgage company subsidiaries, but his office also has the lead role in drafting forthcoming new guidance to banks on mortgage standards. He said that the new guidance could be issued by the end of this month.
Many loan brokers and lenders have pushed their clients into these loans over the past two years. There is no guarantee such financing will be as widely available in 2006 and it was in 2005 and that’s probably a good thing.