Sunday, January 14, 2007
At 64, and looking toward his retirement next year, Willie Lee Howard agreed to refinance his duplex in Northeast Washington, thinking that a fixed-rate loan would help stabilize his finances.
What Howard got instead was a mortgage he did not understand. Baffled by the loan documents he was mailed after the closing, he consulted an AARP lawyer and learned that he now had an interest-only loan, a new and controversial kind of mortgage. Howard was told that under its terms, his mortgage balance will rise instead of fall and that he will need to refinance in 10 years, when he may be too old to work.
"This is a bunch of junk they done to me," said Howard, a construction worker.
Howard's chagrin at his mortgage's complex provisions illustrates the confusion felt by many borrowers struggling to adapt to a radically transformed home lending market. Consumer advocates say most people learned about mortgages from their parents and grandparents, who typically put down 20 percent on a 30-year fixed loan on which they always knew what their payments would be.
Those long-standing assumptions have been challenged in recent years by the rapid proliferation of new loan products with looser credit requirements and fluctuating payment plans. Although the newer mortgage products allow almost anyone to buy or refinance a house, consumer groups say the loans often contain land mines hidden in the fine print.
Consumer advocates say the loosened standards are putting more people at risk as loans originally designed for sophisticated individuals are being marketed to far-less-savvy borrowers.
"Consumers haven't caught up with the dynamics of the market," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. "They are still thinking of how it use to be, but it isn't like that anymore."
Alternative mortgage loans were first developed for a handful of people with promising long-term earnings potential: young lawyers destined to make partner, doctors finishing medical school or stock brokers who get large commission checks several times a year.
But as housing prices have surged, outstripping wages in the most expensive markets, alternative financing has become a popular path to homeownership.
These new loans come in many forms. "Nontraditional" mortgages allow borrowers to pay only the interest on the loan or even only a portion of the interest each month, without being required to pay down the principal. Nationwide, more than a third of borrowers who got loans in the first nine months of 2006 got nontraditional loans, up from about 2 percent in 2000, according to First American LoanPerformance, a real estate information firm.
"Piggyback" loans allow people to borrow for a down payment, sparing buyers the trouble of saving for years and letting them avoid paying mortgage insurance, which is usually required on loans with down payments of less than 20 percent. In 2005, about 22 percent of people buying homes took out piggyback mortgages, according to the Federal Reserve.
"Subprime" loans are available to people who have bad credit, though they charge interest rates 2 to 3 percent higher than the rates charged to borrowers with good credit. About a fifth of the loans originated in 2006 now fall into that category, up from about 5 percent in 1999, according to the Federal Reserve.