Interest rates have started to rise, and the housing market is cooling off, a combination that is putting a squeeze on mortgage lenders. Now, some of them are turning to more complicated loans, a remnant of the last housing boom, to bolster their business.
These risky offerings fall under the umbrella of non-qualifying loans, meaning they do not conform to standards set by the Consumer Financial Protection Bureau. But 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.
One popular loan is the interest-only adjustable rate mortgage, with which a borrower pays only the interest for a period before the rate resets and principal becomes part of the payment. Another is the income verification or “ability to repay” loan, tailored to a borrower who does not have regular wages but is paid in large chunks of money — for example, from an investment partnership.
These types of loans may be a good strategy for a wealthy home buyer, but some say they still carry the taint of overeager and unscrupulous brokers who pushed them on borrowers unable to repay them, creating a bubble in the housing market that burst in 2008.
“All of these types of loans make anyone who is in this business cringe,” said Tom Millon, chief executive of Capital Markets Cooperative, a network of 550 small mortgage lenders and servicers.
Still, lending standards are higher, he said.
“We’re not talking about the no-asset, no-income, no-verification loans,” he said. “We’re talking about someone