GSEs Questioning IOs, 40-Year Loans

The secondary market is beginning to question the unbridled growth of interest-only mortgages, 40-year loans, and other products designed to capitalize on the rapid run-up in housing prices.Interest-only loans "have a place, but where we get nervous is their suitability to the borrower," Thomas Lund of Fannie Mae said at the Mortgage Bankers Association's National Secondary Market Conference in San Francisco. Such loans may be appropriate for some borrowers, but they could prove disastrous for those who are relying solely on skyrocketing values, Mr. Lund said. Borrowers are "not saving much [in the form of lower monthly payments] in relation to the potential for an upward adjustment" in the interest rate, he said. Donald Disenius of Freddie Mac said he had similar concerns, particularly when consumers use their mortgages to accumulate wealth through appreciation rather than amortization. And William Batz, executive vice president of the Federal Home Loan Bank of Pittsburgh, said making interest-only and 40-year loans to some people could smack of predatory lending. "IOs may be suitable for the right market," he said, "but they could be characterized as predatory for the wrong borrower."