Understanding Toxic Loans

From the Washington Post:

Mortgage-Trapped

At 64, and looking toward his retirement next year, Willie Lee Howard agreed to refinance his duplex in Northeast Washington, thinking that a fixed-rate loan would help stabilize his finances.

What Howard got instead was a mortgage he did not understand. Baffled by the loan documents he was mailed after the closing, he consulted an AARP lawyer and learned that he now had an interest-only loan, a new and controversial kind of mortgage. Howard was told that under its terms, his mortgage balance will rise instead of fall and that he will need to refinance in 10 years, when he may be too old to work.

“This is a bunch of junk they done to me,” said Howard, a construction worker.

Howard’s chagrin at his mortgage’s complex provisions illustrates the confusion felt by many borrowers struggling to adapt to a radically transformed home lending market. Consumer advocates say most people learned about mortgages from their parents and grandparents, who typically put down 20 percent on a 30-year fixed loan on which they always knew what their payments would be.

Those long-standing assumptions have been challenged in recent years by the rapid proliferation of new loan products with looser credit requirements and fluctuating payment plans. Although the newer mortgage products allow almost anyone to buy or refinance a house, consumer groups say the loans often contain land mines hidden in the fine print.
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Consumer groups also say they would like to see a “suitability” standard imposed on mortgages whereby lenders would be required to show that people got loans appropriate for them. Sugarman, for example, thinks putting Howard into an interest-only loan left the man with a “horrible situation.” But banking trade groups oppose these proposals, saying they could curtail lending to some people who would otherwise have trouble getting loans they need.

Additional government regulation “could impede the ability of the market” to change to meet demand, said Doug Duncan, the chief economist at the Mortgage Bankers Association.

But Fishbein, the consumer activist, said legislators, regulators and lenders need to do more to protect consumers.

“We’re not confident buyers are getting all the information they need,” he said. “They don’t understand the toxic environment.”