Fitch: U.S. Risks of 40-, 45-, and 50-year Mortgages Vary by Product.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- A recent study by Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. shows that mortgage products with amortization terms of more than 30 years present markedly different risk profiles for different product types. Fitch identified that the 40-year option adjustable-rate mortgages (ARMs) face significantly larger payment increases relative to their 30-year counterparts, while the 2/38 hybrid ARM has a 5% higher payment shock exposure. 'The main risks associated with a longer amortization schedule are the higher payment increases, increased adverse selection risk, and slower equity build-up,' said Suzanne Mistretta, Senior Director at Fitch. 'Forty-year option ARMs have lower initial payments than 30-year option ARMs due to the longer amortization term and similar initial rates. This feature causes the 40-year product to experience a higher payment increase when the loan is recast. Adverse selection risk, or the increase in a borrower's purchasing power Purchasing Power 1. The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power is important because, all else being equal, inflation decreases the amount of goods or services you'd be able to purchase. 2. , is relatively benign, unless the borrower is qualified at a teaser rate Teaser rate A low initial interest rate on an adjustable-rate mortgage to entice borrowers, that is later eliminated and replaced by a market-level rate. payment. In that case, the option ARM borrower can purchase a significantly more expensive home by switching from a 30-year term to a 40-year term. Fixed-rate mortgages (FRMs) and hybrid ARMs with 40-year terms have less adverse selection risk than the option ARMs, though it increases incrementally as the amortization term extends beyond 40 years, i.e. 45 or 50 years. Except for the 50-year FRM FRM From FRM Form FRM Fixed-Rate Mortgage FRM Financial Risk Manager (GARP) FRM Fondation pour la Recherche Médicale FRM Financial Resource Management FRM Final Rulemaking FRM Fiber-Reinforced Metal FRM Federal Reference Methods , both the ARM and FRM products have a 7%-11% larger balance than their 30-year counterparts by year 10. The 50-year FRM has a 12.5% higher balance compared to a 30-year term by year 10. Issuance of longer term mortgages has become increasingly common and is likely to continue to grow. As of April 2006, 40-year option ARMs and 2/38 hybrid ARMs each accounted for 8% of the Alt-A and subprime sectors' securitized securitized Of, related to, or being debt securities that are secured with assets. For example, mortgage purchase bonds are secured by mortgages that have been purchased with the bond issue's proceeds. volume, respectively. That compares to 2% and 1%, respectively, for all of 2005. The Fitch report,'40-, 45-, and 50-Year Mortgages: Option ARMs, Hybrid ARMs, and FRMs,' is available on the Fitch Ratings web site at 'www.fitchratings.com'. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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