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Mortgage Bankers Fret About "Creative" Loans

August 23, 2005
Add the Mortgage Bankers Association to those who are worried about homeowners taking out home loans that feature low initial payments that can rise dramatically over time.

Mortgage Crisis? Act Now to Avoid Foreclosure • Avoiding Foreclosure Takes More Than Hope --- • Home Prices Fall, But News Is Less Bad For Homeowners • Marketing Analysis Suggests Housing Bottom • Mortgage Rates Dip As Inflation Fears Ease • Have Mortgage Rates Hit Bottom? • Ex-Countrywide CEO Faces Fraud Charges • Pending Home Sales Surge in April • Foreclosure Starts Hit 1 Million For the Year • Mortgage Delinquencies At Record High • Existing Home Sales Rise in April • U.S. Home Values Now 32 Percent Below Their Peak • Bankruptcy Not Helping People Keep Their Homes • Home Values Plunge 14 Percent In First Quarter • One In Five Homeowners Underwater • Pending Home Sales Turn Around In March • Senate Defeats Mortgage 'Cram Down' Bill • Mortgage Rates Keep Falling • Home Sales Fall in March • Home Prices Show Surprising Gain in February • Foreclosures Up 9% in First Quarter • Southern California Home Sales Up Again in March • Mortgage Applications Rise Sharply • Obama Administration Targets Mortgage Fraud • Homeowners Still Behind On Modified Mortgages • Consumers Fall Further Behind on Loan Payments • Pending Home Sales Show Some Life • Home Prices Down To 2003 Levels in January • Fed Action Spurs Refinance Frenzy • Existing Home Sales Jump Five Percent in One Month • California Authorities Arrest "Loan Modification" Scam Artists • Southern California Home Sales Up Again • Loan Modifications Can Reduce Foreclosures, Study Says • Scammers Use Forged Bank Letterhead to Con California Consumers • Foreclosure Activity Up Six Percent in February • States Battle Feds To Enforce Lending Laws • Mortgage Delinquencies Continue to Climb • Obama Begins Mortgage Rescue Program • One Of Five U.S. Mortgages Under Water • Florida Court Blocks Loan Modification Company's Fees --- • More ...

But wait. Aren't the mortgage bankers the very people selling such loans? The answer is yes, but the MBA says the primary responsibility for being prudent in taking on debt rests with the consumer.

"Borrowers need to be vigilant to be sure that they are prudently measuring and managing" the added risks many accept by embracing loans that minimize monthly payments in the early years but can require much-higher payments later, the trade group said in a 30-page report.

The report echoes warnings from Federal Reserve Chairman Alan Greenspan, bank regulators and the National Association of Realtors about the risks of non-traditional loans.

The worrisome mortgages include interest-only loans with rates that follow prevailing interest rates. With these loans, borrowers pay only the interest during the first few years but then monthly payments rise sharply as the borrower begins paying off the principal.

If interest rates rise sharply over the next few years, many homebuyers could be in trouble, as their monthly payment could rise dratically as they try to cover higher interest rates as they begin paying on the principal.

Many buyers taking out such loans are counting on continued double-digit increases in housing values, perhaps thinking that they will be able to refinance or sell their home before the higher payments come due. That's not likely to be the case if the run-up in housing prices turns out to be a "bubble."

However, it's not just over-extended consumers that has the mortgage bankers group wringing its hands. Its report warns that "investor activity," meaning speculation, has increased in the hottest U.S. housing markets, primarily those on the East and West Coasts.

"Lenders need to prudently monitor the level of speculative activity in such markets," the MBA report cautioned. Speculation is a factor in driving up housing prices to unsustainable levels. Also, speculators are quicker to walk away from investments gone bad than owner-occupants.

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