Housing Bubble
High risk mortgages threaten home prices
A professor at Wharton is warning that risky mortgage lending practices could burst the housing bubble, causing a crash in home prices.
The problem mortgages are the Interest Only, Pick a Payment and OptionArm. These products are intended to offer borrowers very low monthly payments initially, much lower than usual adjustable and fixed rate mortgage products. The danger is that after just a few years, the monthly payments can jump dramatically and the level of debt can rise rather than reduce over time.
Professor Susan M Watcher of Wharton believes that although we are not yet at the tipping point, such mortgages are contributing to soaring home prices and could set up a hard fall in prices. She believes"these new instruments bring us into uncharted territory".
Although interest only mortgages have been available for a long time, they have only recently been targeted at ordinary home buyers and sub prime borrowers. The initial lower monthly payments allow the homeowner to borrow more than they could with a traditional mortgage but mean that by the time they start repaying the principal, payments will be much higher as less time remains. Add to this the possibility of rising interest rates and the borrower can find that monthly repayments could quickly become unaffordable.
Professor Lynn Sagalyn believes that these"exotic" products allow lenders to reach customers who would have been excluded from the market due to soaring home prices. She feels the increasing competition for business encourages lenders to take more risks.
