By Kirstin Downey
Washington Post Staff Writer
Tuesday, October 24, 2006; D01

Despite concerns expressed by federal regulators about the growth of nontraditional mortgages, their popularity among borrowers continues to rise, according to statistics released yesterday.

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, a trade group in the District. Such loans do not require borrowers to pay down the principal.

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.

In comparison, in the last six months of 2005, 25 percent of mortgages were interest-only and 8 percent were option products. Until 2000, less than 2 percent of consumers had interest-only or similar loans. Most people bought their homes with traditional, fixed-rate loans that allow borrowers to steadily pay off their mortgages until they are free of housing debt.

The lower monthly payments of nontraditional loans have been particularly attractive because home prices have risen so quickly. But regulators have said they worry consumers don't understand that payments on the loans can double or even triple, and that if they pay less than full payment toward principal and interest, they run the risk of seeing their mortgage balance rise, even after years of payments. Most homeowners 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," he said.

The loans have been aggressively marketed by lenders, some of whom have earned record profits by promoting them to consumers.

Last month, federal banking regulators issued a warning to federally regulated lenders, including banks, thrifts and credit unions, that the loans could pose risks for lending institutions because consumers can be unprepared for the sudden jumps in payments, known as "payment shock." These jumps could lead to loan defaults, causing losses for the lenders. Lenders outside of federal oversight, who make 60 percent of these loans, were not affected by the regulators' warning.

The Mortgage Bankers Association criticized the government warning as "regulatory overreach." Many lenders say these loans are appropriate for many borrowers, such as wealthy individuals who want to better manage their cash flow or those who get paid in large lump sums, such as commissioned sales people.

Last week, the Federal Reserve Board took the warning to consumers by issuing a pamphlet about the dangers of nontraditional loans. The pamphlet contains a glossary of terms for these loans and provides worksheets for people to compare risks and rewards. It is available through the Federal Reserve and other banking regulatory Web sites.

According to the mortgage trade group's report, overall loan origination volume fell 16 percent in the first six months of this year compared with the last six months of 2005. Home-purchase originations fell 10 percent and refinance originations fell 22 percent. About 49 percent of borrowers chose fixed-rate loans, including fixed-rate, interest-only loans.

In a separate report, the trade group reported that origination volume fell 30 percent for subprime loans, which are higher-rate mortgages for borrowers who pose greater credit risks, in the first half of 2006 compared with the first half of 2005. Of all loans originated, about 19 percent were subprime.