Risky second home loans seen weighing on U.S. housing

By Julie Haviv

NEW YORK (Reuters) - Secondary homes are becoming a primary problem for the hard-hit U.S. housing market.

The housing industry is worried that a surge of foreclosures seen in the subprime sector could percolate upward. If it does, it is likely to show up next in the "Alt-A" loan market for second homes.

The fear is that when many adjustable rate mortgages are fixed at higher rates borrowers could fall quickly into arrears.

"Investors have been much more heavy users of option ARMs than of other kinds of products and they were in the Alt-A space," said Douglas Duncan, chief economist at the Mortgage Bankers Association, in industry trade group based in Washington D.C.

Whether for investment or vacation purposes, second homes backed by "Alt-A" loans are at a higher risk of defaulting than traditional mortgages.

"If you reside in a home, it is much more probable that you will make your payments on time as opposed to an investment property," Duncan said.

As a result, "you're going to see some slowing in second homes simply because you're not getting the equity accumulation in the first mortgage on the first home than you would've three or four years ago."

These "Alt-A" loans, which is short for "Alternative-A," often go to borrowers who cannot provide full documentation of income or assets to lenders. The option ARM, or adjustable-rate mortgage, offers a low payment that does not even cover interests costs, leaving borrowers each month deeper in debt.