Toxic or More Toxic?

The Consumer Federation of America recently completed a survey and study of non-traditional mortgage products. Unfortunately, the results only serve to further confirm what we've seen and heard before, the bulk of these exotic mortgages are being taken by under-qualified borrowers.

NEW ANALYSIS OF NON-TRADITIONAL MORTGAGE BORROWERS SHOWS LESS
WEALTHY, WEAKER CREDIT THAN INDUSTRY SUGGESTS

As Americans struggle to become homeowners, the use of interest only and optional payment mortgages continues to increase. The burden of these “riskier” mortgages is falling on middle and moderate income borrowers with less than stellar credit scores according to new data released today in a study by the Consumer Federation of America. In addition, the analysis also found that African American and Latinos were more likely to receive payment option mortgages than whites and African Americans were more likely to receive interest only mortgages.

“While the lending industry has characterized non-traditional borrowers as financially sophisticated and savvy consumers, the truth is that many are far from affluent and could be betting the house on their mortgage,” said Allen Fishbein, Director of Credit and Housing Policy at Consumer Federation of America (CFA). Because home ownership is so critically important in financial security, these Americans are unwittingly putting their entire financial livelihood at risk.

Among the key findings:

• Significant Shares of Non-Traditional Mortgage Borrowers Earn Less Than $70,000 Annually. More than one third (36.9%) of interest only borrowers earned below $70,000 annually and about one in six (15.6%) earned under $48,000 annually. More than one third (35.0%) of payment option borrowers earned under $70,000 annually and about one in eight (12.1%) earned between under $48,000. ($70,000 was about the median for Atlanta, Philadelphia and Chicago metropolitan areas, according to HUD figures for 2005, and the national median is $44,300.)

• African Americans and Latinos More Likely to Receive Payment Option Mortgages: Latinos are nearly twice as likely as non-Latinos to receive payment option mortgages. One in fifty (2.1%) non-Latino borrowers received payment option mortgages compared to the 4.0% of Latinos that received payment option mortgages. African Americans were 30.4% more likely than non-African Americans to receive payment option mortgages. 2.2% of non-African Americans received payment option
mortgages compared to 2.9% of African Americans.

• African Americans were more likely than non-African Americans to receive interest-only loans. Nearly one in ten (9.0%) of African Americans received interest-only mortgages, 11.7% higher than the 8.1% of non-African Americans that received interest-only mortgages.

• Many Non-Traditional Borrowers Have Only Average or Even Weaker Credit Scores. More than half (53.8%) of payment option borrowers and nearly two-fifths (38.0%) of interest only borrowers have credit scores below 700. More than one fifth (21.4%) and about one in eight (12.1%) interest only borrowers had credit scores below 660.

• The majority of these two types of non-traditional mortgages are used to purchase homes. Nearly four out of five (79.0%) interest-only mortgages and nearly three fifths (57.5%) of payment option loans were used to finance the purchase of a home. The high proportion of purchase mortgages in the non-traditional mortgage portfolio tends to support the contention that the increased use of these mortgage products is related to the rapidly escalating cost of housing.

The full text of the study can be found here:
Exotic or Toxic? An Examination of the Non-Traditional Mortgage Market for Consumers and Lenders