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.”

3 thoughts on “Despite Warnings, Consumers Opt for Riskier Loans”

  1. Interest-only loans can serve a very useful purpose. Since the after-tax cost of mortgage debt is cheaper than just about any other debt we’re likely to incur, paying down the principal on the mortgage should logically be the lowest priority of any debt payments. For instance, my wife has some private student loans with an interest rate of more than twice our mortgage rate. Paying down principal on the mortgage is financially unwise until this student loan is fully repaid. Our other debts (car loan, etc) are also at various rates higher than our home mortgage, and also lack its tax advantages.

  2. Hi Yam,

    Thanks for your comments.

    I think for the “risky” loans are fine for financially secure people who choose them for strategic reasons. People who choose them out of financial necessity are the ones who will have problems – buyers who just want a bigger/nicer home than their budget allows. You also achieve a slower equity build-up with interest only loans, so buyers making a small downpayment and then experiencing a flat or falling market could get into trouble if they don’t have the cash reserves to bail out if needed.


  3. i wonder if the new bankrupcy laws will have an impact… since chapter 7 is so hard to do any more… maybe more mortgage companies will start getting deficiency judgements since ch 7 is unlikely…

    of course so many buyers are just plain stupid (not that there’s anything wrong with that… and i’m not picking on cavemen either) they will always choose the lower payment.. regardless of consequence ….


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