For the past decade or more, home loans have tended to be anything but basic. Complex loans, such as those that feature interest-only payments or option Adjustable Rate Mortgages, have been the rule, rather than the exception. The sheer complexity of the home loan marketplace can leave the new home buyer frustrated and confused. In addition, these complex loans are, at least in part, intertwined with the economic downturn in the housing market.
Option-AMR mortgages, for example, allowed the borrower to defer their interest while they made payments on the principal. This worked fine, until home prices began to fall. At that point, payments rose and the deferred interest payments caused many mortgages to increase while the value of the home dropped. This created a huge loss for the lender. Many companies that featured these products, such as IndyMac, Bancorp Inc., Washington Mutual Inc., Downey Financial Corp., Wachovia Corp., and Countrywide Financial Corp. have all folded or been bought out since the downturn hit.
Home lenders, such as Wells Fargo, are realizing that this is a problem, and are offering potential home buyers the choice of a basic, “vanilla” loan. Many of the home loan companies offering exotic mortgage products are closing their doors or at least scaling back, and Wells Fargo sees this as an opportunity. New home buyers need and want simple mortgages that they can afford and that won’t create a great deal of risk either for the lender or for the mortgage company.
Wells Fargo and the mortgage companies offering these vanilla loans aren’t the only ones who support the idea. Many politicians, including the President, support the idea of the vanilla loan. There is even legislation being talked about that would make it so that a new home loan is a vanilla loan, by default. If the home buyer wanted to explore other loan types they could, but most loans would be your standard loan, such as a 30-year fixed mortgage.
In the end, vanilla mortgages will not only help the overall loan market, they should create less risk for home-buyers. Buyers can be relatively sure that their home won’t be worth less than what they owe, even if the housing market should take another dive.
