Despite Warnings, Consumers Opt for Riskier Loans
Source: The Washington Post, (10/24/06)
Borrowers continue to choose risky nontraditional mortgages, even after state and federal regulators have issued widespread warnings about the unstable and rapidly rising payments associated with this kind of financing.
About 26 percent of mortgage loan originations by dollar volume in the first six months of 2006 were interest-only loans, according to the Mortgage Bankers Association.
Another 13 percent were “option” adjustable-rate loans, which allow customers to pick their payment amount, including a low-cost choice that covers neither the full interest nor the principal.
The loans have been marketed aggressively by lenders to consumers who find them an attractive way to cope with rapidly rising home prices. Payments on the loans can double or even triple as rates adjust and reflect unpaid principal. Most home owners are making only the minimum payments, according to banking data.
Consumer demand is behind the growth in these loans, Doug Duncan, chief economist for the Mortgage Bankers Association, said in a statement. “As expected, consumers respond to changing opportunities in the marketplace, but it looks like these products serve an important need.”