Alternative Mortgages Gain In Popularity

Novel products accounted for up to 25% of new home loans over the past year.
By: MICHAEL SCHROEDER: The Wall Street Journal Online
Banks are increasingly making interest-only loans and offering other novel mortgage products, but those alternative financings accounted for less than a quarter of all home loans originated over the past year, according to a Federal Reserve report.

For the first time, the Fed's July survey of senior loan officers provides information about lending trends for nontraditional home loans, such as mortgages that initially let borrowers pay interest and no principal, and keep payments low in the first years.

The survey indicated that over the 12 months ended in July, 19 of the 46 banks that responded said nontraditional mortgages had risen to 5% to 25% of total originations. The 19 banks accounted for 72% of all residential mortgages on the books of all respondents at the end of the first quarter. The largest banks reported the share of alternative loans was 16% to 25%, the Fed said. More than half of respondents said the share has increased moderately or substantially over the previous 12-month period.

Federal financial regulators - the Fed, the Federal Deposit Insurance Corp. and the Treasury Department's Office of the Comptroller of the Currency and Office of Thrift Supervision - have identified the new mortgage loans as a cause for concern and are preparing joint guidance for banks on writing them.

With rising property values, low interest rates have helped keep delinquencies down by keeping monthly payments in check and making it easy for borrowers who run into trouble to refinance or sell their homes at a profit. Just 1.08% of residential mortgages were in foreclosure proceedings at the end of the first quarter, down from 1.17% five years earlier, according to the Mortgage Bankers Association.

The mainstream marketing of products that initially had been geared toward the most sophisticated borrowers indicates lending standards overall are loosening. In addition to interest-only loans, the alternative mortgages include option-adjustable mortgages that carry introductory rates as low as 1% and give borrowers multiple payment choices. Borrowers who elect the minimum payment can see loan balances rise.

According to the Fed, more than 85% of the loan officers said their institutions had resold less than 25% of the loans through mortgage-backed securities. In contrast, three large banks that accounted for 40% of the group's residential mortgages said they had securitized more than three-quarters of their nontraditional home loans.

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