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.


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

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57 Responses to Toxic or More Toxic?

  1. Anonymous says:

    When I was out of a job in 2004, my bank encouraged me to take out an equity line of credit.Though I had my emergency fund, I could not understand why they would lend someone money if they had no income. I had equity in my house, but never expected the bank to recommend debt to someone who could have went belly up one year later. Maybe I was looking good that day!

  2. Anonymous says:

    House prices were driven up based upon buyers’ ability to borrow money.

    House prices will be driven down based upon homeowners’ ability to repay that money.

  3. seattle price drop says:

    What a great post Grim.

    Even if it does make me really sad. I feel like these people were just plain used.

    In Seattle they had this (obligatory?) class for first time home buyers.

    Every person that I knew that went, without exception, was encouraged to take out way more loan than they felt they could comfortably afford.

    A couple weeks ago the Seattle Times ran an article with how to squeeze yourself into an overpriced home. The tips? Yep, take out one of these nutty loans.

    This crap has got to get fixed.

  4. Anonymous says:

    Bubble in Summit??

    I have been following this listing for some time. It is a 3 bed 1.5 bath in a “ok” but not nice part of Summit. It is listed for 565k with 6,614 tax/year. It just listed for 2,500 monthly rent today.

    With 20% down and 6.25% 30 fixed, it would cost 3,334.21 excluding maintenance.

    Those listings are listd on the same page of the realtor’s website!!!

    why would anyone want to but it now???

    Sales link

    Rental Link

  5. Anonymous says:

    Chiming in from PA

    Same here on the rent differential, but the rents are lower. A nice condo/townhome in a great neighborhood rents for $1,500 or less!

    Not paying taxes pays for almost half the annual rent!

  6. Anonymous says:

    It looks like the average non-traditional borrower makes well over the median salary (2/3rds make over 70K)

    I see the disconnect between house price and median salary used as a justification for a housing correction, but it looks like median-salary people aren’t the ones buying houses.

  7. Anonymous says:

    Does anyone know…

    What is the percent of speciality loans (ARM/Interest only) this year?

    What percent of loans/home sales is being driven by investors?

  8. Anonymous says:

    Do NOT be a MORON and put yourself into Bankruptcy using one of these “I want it now” loans.

    JUST say NO MAAS to these greedy Mtg Brokers bankers realtors and builders.




  9. Richard says:

    that house in summit. yes i’ve been casually watching it too. lois schneider realty. there’s real characters in there.

    anyways 6.25% on a 30-year fixed ain’t happening unless you’re paying points. 6.5% is the best you can probably do without points. so lets redo the calculations.

    borrow $452k @6.5% 30-year fixed = $2857. prop taxes = $551 a month for a total monthly outlay of $3400. add in the loss of 4.5% interest on your down payment in a high yield MMA = -$423 a month so you’re real difference is $3823. assume 25% tax writeoff and you’ll get back about $725 a month for a revised amount of $3094.

    so you can rent for $2500 (which is still high IMO) or buy for a net difference of $3094 or $600 a month. now you’re building some equity so in the end it’s a wash and doesn’t seem like such a bad deal but what’s not included here is all the costs of maintenance and upkeep which can be 1-2% of the purchase price annually.

    from a financial perspective there’s no point in buying this house now as you have little upside.

  10. Anonymous says:


    What is Lois Schneider. Have you dealt with them before. They seem very nice and not pushy in open houses.

  11. …and all these people will have left to their name is the Home Depot Chandelier which once graced the entrance foyer to their furniture-less house

  12. richard – be careful of the AMT

    “assume 25% tax writeoff and you’ll get back about $725 a month for a revised amount of $3094.”

  13. UnRealtor says:

    “What is Lois Schneider. Have you dealt with them before.”

    I’ve dealt with them on the phone several times — put it this way, they haven’t changed my low opinion of realtors in the least.

  14. UnRealtor says:

    Here’s another rent vs buy comparison using the same house:

    Buy @ $799,000 (MLS 2261641)

    Rent @ $2,500 a month

    To buy, come up with $160,000 down payment, pay a $4,040 monthly mortgage (assuming 30-year @ 6.5%), pay monthly property taxes of $750, add in insurance, etc.

    Or rent and pay $2,500 a month.

    Tough decision, let me talk to a realtor to help clear things up.

  15. UnRealtor says:

    More details on that above house (MLS 2261641) which for sale or rent:

    Monthly Cost – BUY
    + $533 (Lost opportunity cost of not investing $160,000; assumes 4% annual return)
    + $4,040 mortgage payment
    + $750 property taxes
    + $150 property insurance
    + $667 maintenance (assumes 1% annually)

    Any guesses at the IRS tax deduction?

    Monthly Cost – RENT

  16. UnRealtor says:

    Heh, forgot to add in the $15,000 closing costs on the “BUY” side.

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