by Calculated Risk on 10/24/2006 12:04:00 AM

The WaPo reports: Nontraditional Mortgages Don't Wane Under Warnings

Despite concerns expressed by federal regulators about the growth of nontraditional mortgages, their popularity among borrowers continues to rise, according to statistics released yesterday.

About 26 percent of mortgage loan originations by dollar volume in the first six months of 2006 were interest-only loans, according to the Mortgage Bankers Association, a trade group in the District. Such loans do not require borrowers to pay down the principal.

Another 13 percent were "option" adjustable-rate loans, which allow customers to pick their payment amount, including a low-cost choice that covers neither the full interest nor the principal.

In comparison, in the last six months of 2005, 25 percent of mortgages were interest-only and 8 percent were option products. Until 2000, less than 2 percent of consumers had interest-only or similar loans.

This data is a little stale (first half of 2006).

Last month, federal banking regulators issued a warning to federally regulated lenders, including banks, thrifts and credit unions, that the loans could pose risks for lending institutions because consumers can be unprepared for the sudden jumps in payments, known as "payment shock." These jumps could lead to loan defaults, causing losses for the lenders. Lenders outside of federal oversight, who make 60 percent of these loans, were not affected by the regulators' warning.

Not mentioned in the article is the new State Guidance due within "weeks, not months" that will cover the remaining lenders.