What lending options have gone the way of the dinosaur?

By Peter Ricci

Simon Stein

Finance has always been defined by its versatility, the way that banks and financial firms are able to offer new products to consumers that better reflect the present market conditions. The housing boom was no exception, as lenders provided homebuyers with financing options designed to meet the strong demand of the market. But today, many of those loans are no longer available, and to get a fuller understanding of what types of loans have become extinct, Chicago Agent spoke with Simon Stein, sales manager with Wintrust Mortgage in Chicago.

Reduced Documentation Loans – “You might laugh,” Stein said, as he described arguably the most common of the boom-era financing options. Reduced documentation loans were used frequently in the “fast and easy loan programs” of lenders like Countrywide Financial. As the name would indicate, these kinds of loans required next to no documentation from the homebuyer, so the income records that are normally necessary to secure a home loan, such as tax returns and pay stubs, were never requested. Stein said the economic downturn has all but eliminated reduced documentation loans from the financial markets. “I don’t see reduced doc ever coming back,” Stein said.

Assumable Mortgage – the assumable mortgage is when the buyer of a home inherits, or assumes, the mortgage of the home’s seller, rather than takes out his or her own home loan to cover the purchase price. Though enticing on the surface, several factors have contributed to assumable mortgage’s waning popularity, the most notable being historically low interest rates. Assuming the seller’s loan only makes sense if the loan offers better financing than what is currently available, so why accept a loan that was made at 6 percent in 2007 when 30-year FRM are currently available at 3.94 percent? Couple that with falling home prices, and you have an incompatible financing option for today’s market.

Zero Percent Financing – like reduced documentation, the zero percent financing loan is exactly what the name would imply – a home loan with zero money down, not the 10 or 20 percent that is typically required of a homebuyer. “Zero percent was available to anyone,” Stein said, regardless of the buyer’s credit score. “You could even go zero percent/reduced documentation, meaning, ‘Hey, you’re the bank, I want you to give me the entire amount that I need. I’m not going to show you any pay stubs (and) I’m not going to show you any bank statements.’ Those were out there.”

103s – also called “Zero Down Plus,” the 103 loans were another Countrywide innovation that derived their name from the nature of the loan. Not only were homebuyers lent the initial zero down, 100 percent financing, but they were also lent an additional 3 percent to cover the home’s loan and title fees, mortgage insurance premiums, closing costs and even the down payment of the house. So essentially, Countrywide, and the other lenders that offered 103s, were paying the homebuyers to accept the loan.

Negative Amortization Loan – also called “NegAm” or “Option Arms,” Stein said the negative amortization loans were the most “notoriously bad” financial product of the housing boom, a statement that, given the nature of the previous lending options, is certainly saying something. The negative amortization loan offered homebuyers three or four options for how they would like to pay their mortgage, and one option involved paying a monthly amount that was less than the interest on the loan. So rather than pay the $2,000 monthly payment of a typical 30-year FRM for $200,000, the homebuyer would pay $1,000 and add $1,000 to the total cost of the loan, which would then become a $201,000 loan. Stein said the loans originated in Southern California, where homebuyers, hoping to cash-in on the soaring home prices of the region, would buy a home, take out a NegAm loan to pay as little as possible on the mortgage, and then re-sell the home 12 months later for a 10 percent gain. That process, Stein said, became one of the major lynchpins for the housing boom, as everyone sought to profit on a housing market that seemed as if it would appreciate forever. As a result, negative amortization loans are now illegal in most states.

Today, homebuyers have access to fixed-rate, adjustable-rate and government mortgages through the Federal Housing Administration, and that’s it. Are 103s and NegAms actually “extinct,” never to return? Stein “firmly believes” that, though credit requirements may loosen in time, the “exotic loans” are gone for good.