NYT: Risky mortgages are making a comeback

Lending

It’s been a tough year for mortgage lenders. With the housing market slowing down and interest rates rising, many are starting to feel the pinch.

The latest Mortgage Lenders Performance Report from the Mortgage Bankers Association revealed that profits tumbled to a new low for the third quarter, with lenders earning just $480 per loan.

To boost profits, some lenders have turned to non-qualifying loans, or loans that do not meet Consumer Financial Protection Bureau standards, according to a recent article published in The New York Times.

“Lenders are starting to push the loans on borrowers, who are using them to get into homes that may be bigger and more expensive than what they could otherwise afford,” author Paul Sullivan wrote.

Sullivan pinpointed interest-only ARMs and income verification loans, or “ability to repay” loans for those who are not paid regularly but in large chunks, as troubling.

These might be solid options for wealthy homebuyers, but they “carry the taint of overeager and unscrupulous brokers” who helped create the housing bubble in 2008, Sullivan wrote.

Sullivan said lenders are insistent that these “complicated” loans are only available to qualified borrowers, but said the offerings can still be confusing, delving into an anecdote of one homebuyer who chose an interest-only ARM.

While Sullivan acknowledges that an IO loan could be a sound choice for some, there are pitfalls to beware, particularly unexpected downturns in certain pockets of the market, like what’s happening right now in New York City’s luxury market.

“When the local economy slows or the housing market stalls, interest-only buyers could be hit harder if they weren’t diligent in paying down the principal,” Sullivan warns, adding that “even qualified borrowers need to be aware of the loans’ risks.

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