With consumer competition for mortgage lenders' dollars at record levels this spring, you might be interested to know how you stack up from the lender's side of the table.
To help you switch perspectives, consider the provocative findings of a new national study of borrowers' risk characteristics, conducted by Verex, a major insurer of home mortgages in Madison, Wis. Verex made detailed statistical analyses of its tens of thousands of insured mortgage loans recently and came up with these conclusions, among others: Executives and business managers, self-employed businessmen and sales personnel represent greater risks of becoming "delinquent" -- falling behind on their loan payments and eventually triggering defaults -- than do many other groups of borrowers. A self-employed businessman, for instance, is 3 1/2 times more likely to become a problem than a government employe or member of the military.
Retirees with no employment income are nearly twice as safe risks as executives and managers with significant incomes. The type of mortgage you seek or obtain is a key indicator of how you'll fare as a borrower. Although many lenders assume that traditional fixed-rate mortgages represent the safest bet, that's not the case, according to Verex. Growing-equity mortgages (GEMs), adjustable-rate mortgages (ARMs), graduated-payment loans and interest-subsidized "buy-down" mortgages perform better than fixed-rate loans.
GEMs increase a borrower's monthly pay-down of the principal debt, thereby giving him or her a larger ownership stake in the home earlier than a regular fixed-rate plan. Graduated-payment and fixed-rate builder "buy-down" mortgages offer low initial monthly costs as enticements to borrowers whose incomes may be modest, but whose earning potentials are high. Apparently, according to Verex's findings, once qualified buyers sign up for the discount plans, they tend to be responsible and stick with the scheduled payment increases. So-called "balloon" loans -- popular during the housing recession of l980-1983 -- produce more trouble for lenders and borrowers than any other types of mortgages. Balloon loans are normally fixed-rate, short-term, three- to five-year mortgages. The monthly payments are set at the same dollar levels as 30-year loans with comparable interest rates. After three or five years, the unpaid principal balance is due in a lump sum as a final payment -- a billowing balloon that many borrowers can't come up with. Also at the high-risk end of the spectrum are reverse-annuity mortgages (RAMs), designed to allow elderly homeowners to tap their equity via monthly borrowings. The type of property you're buying or refinancing is another clue to your ultimate performance as a borrower. You might assume that single-family detached, owner-occupied houses represent the safest bets of all, but they're not. Town houses, duplexes and three-unit (triplex) properties rank higher. Condominiums, by contrast, tend to perform significantly worse. The higher your interest rate, the higher your risk of becoming delinquent. Verex found, for example, that a 17 percent mortgage is 5 1/2 times more likely to go sour than a 10 percent mortgage. The reverse is true for "discount" adjustable-rate loans: The deeper the initial rate break to you as a borrower, the more likely you are to get into payment trouble eventually. An adjustable offering a discount of 3 1/2 percentage points or more for the first year is twice as likely to become delinquent as a loan with less than a 3-point break in the first year.
What are findings like these likely to mean in the mortgage marketplace? Plenty. For starters, Verex no longer will insure certain types of borrowers and mortgages as a result of its analyses.
Robert Waldo, chairman of Verex and author of the study, emphasized that the vast majority of borrowers "are excellent risks," and will never turn up in Verex's national mortgage delinquency statistics. So even if you fit into one of the newly identified categories of home finance risk, such as a self-employed business executive looking to buy a high-cost condo in Denver, don't be discouraged. The odds are strong that you're a good mortgage bet this spring.