Risky Mortgages

by Andrea Messenger
May 27, 2005

The rising popularity of non-traditional mortgages such as interest-only loans, adjustable-rate mortgages, and low or no-doc loans has some experts worried this could mean financial trouble for both borrowers and lenders. In fact, the possibility of such risks has federal banking regulators concerned enough that they are in the process of developing new lending guidelines.3 Regulators already issued new guidelines for home-equity loans and lines of credit to lenders this month (May 2005); these guidelines require lenders to look closer at a borrower’s income, debt, and ability to repay the loan rather than lending “simply on credit scores.”4

The Mortgage Bankers Association says that in the second half of 2004 based on dollars lent, 17% were interest-only loans and another 46% were adjustable-rate mortgages.3 These types of mortgages allow borrowers to obtain a more expensive home or a larger mortgage than they could qualify for in a traditional mortgage and lowers their initial payments; the problem is that within 3-5 years (typically), the monthly payment can jump to a much higher amount.3,4 The borrower and lender are both in trouble at that point if the borrower can’t afford the new payment – especially, if the value of the home has dropped, it is possible more will be owed on the mortgage that the home is worth.4

Traditionally, Americans have had level payments over the life of their mortgages and have allowed the equity in their homes to build. With the tremendous appreciation rates, more people are tapping into the profits in their homes and “mortgage borrowing has grown even faster than home values have.”1 It is important that homeowners understand both the benefits and the risks associated with borrowing under non-traditional mortgage terms.

The Jim Messenger real estate team can provide the information you need to make the right decision about Phoenix real estate and the financing options that best suit your needs.

1 “As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate,” James R Hagerty and Ruth Simon. The Wall Street Journal. May 23, 2005, page A1.

3 “New Mortgage Guidelines Planned,” Ruth Simon and James R Hagerty. The Wall Street Journal. May 19, 2005, page D2.

4 “Concerns Mount About Mortgage Risks,” Ruth Simon. The Wall Street Journal. May 17, 2005, page D1.

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