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Interest Only, Negative-Amortization Loans Not Seen as a 'Systemic Risk'

The payment shock risk posed by interest-only and negative-amortization loans is a concern, but the percentage of these loans in the overall market is too small to consider them a "systemic risk," a Bear Stearns researcher said in a July 7 teleconference.

Dale Westhoff, head of Bear's mortgage-backed securities research department, said the number of these loans in the market is "significant" but not large enough to be considered to have the potential to jeopardize the market as a whole or cause a severe home price correction.

The risk of these loans is limited to some extent by the fact that relatively few are made to nonprime credit borrowers, Mr. Westhoff said. Instead, they tend to be made to near-prime or prime credit non-agency borrowers, he said.

Mr. Westhoff said the loans probably have contributed to rising house prices and have helped "marginal" buyers to purchase homes in high-cost areas such as Southern California, parts of Florida, Arizona and Las Vegas.

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