Denmark's central bank governor, Lars Rohdesaid's support for interest only loans has been welcomed by mortgage bankers after a proposal to phase them out was introduced recently.
The previous central bank governor, Nils Bernstein, has argued that interest only loans were inherently risky and should be phased out.
The proliferation of what Fed chairman Alan Greenspan dubbed exotic mortgage products such as adjustable rate loans, piggyback loans, interest only loans, and home equity loans, whose monthly payments can as much as double if interest rates rise to not unfathomable levels, as well as mixed economic signals such as choppy job growth, and the way real estate appreciation has exceeded salary increases have provided fuel for many an apocalyptic scenario.
Interest only loans, which offer cheap payments for the first few years, convert to standard amortization mortgages after a set period of time, wherein the buyer has to take on both principal and interest payments.
Risks include the portfolio's lack of seasoning and geographic concentration, as well as the permitted financing of various loan products and a growing percentage of interest only loans
For instance, we're seeing greater demand for interest only loans
and a wider range of adjustable rate products.
We have spent a significant amount of time and research with focus groups and all indications are the Job Loss Protection Programs are a significant selling point, which make our products, including Interest Only loans
, an impressive choice.
Those chickens will begin coming home to roost later this year as payments on adjustable and interest only loans rise.
She added that, while interest only loans have their place, many buyers used such loans to qualify for more house than they could otherwise afford.
McGee pointed to the growing use of interest only loans
and the newer so-called option ARMS as another source of potential trouble in the future.
Typically, the interest only loans
convert to fully amortize adjustable rate loans in five years.
Effective December 8, 2003, NovaStar's Interest Only Loans
will include interest-only payments for five years with an adjustable rate mortgage or for 10 years on 30-year fixed rate.