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O.C. Home Buyers Take Bigger Financing Risks

Reports from real estate information provider DataQuick revealed that more Orange County home buyers are making high-risk choices in terms financing, and that lenders are more willing to take on these risks as well.

According to DataQuick, 6.2% of financed home purchases in October were adjustable-rate mortgages-still a small part of the market, but the busiest season for the sub-prime market in the past twelve months.

Adjustable-rate mortgages account for most of the defaults and foreclosures that caused the collapse of the real estate market. During the sub-prime boom, both buyers and lenders focused on the teaser rates and overlooked the risk of variable payments.

In October 2004, when adjustable-rate mortgages were at their peak, as much as 82.2% of mortgage loans taken out in Orange County were in the sub-prime category. A large chunk of them eventually went into default or foreclosure within the next few years.

Today, lenders are “forcing” buyers to qualify for adjustable mortgages by comparing the borrower's income with the projected costs of the mortgage after full adjustment, rather than just the discounted payments.

The new policies run contrary to the ones enforced in the past two years, where many lenders decided to toughen up their standards.  This has caused Orange County real estate market, especially in upscale areas, to slow down considerably.

However, lending is still less risky today during the sub-prime boom as bankers have become more wary. The DataQuick report showed that the typical down payment for first-time buyers was 18.8% in October, higher than the average for the past six months.