The riskiest mortgages offered by U.S. subprime lenders have been a driving force behind escalating delinquencies and defaults. Here are five popular varieties:
Negative Amortization loan:
The monthly payment on this mortgage is smaller than the interest due, causing the total loan balance to rise. In addition, these minimum payments balloon after a fixed period, typically two years, squeezing a homeowner’s cash flow, if they can’t refinance.
Borrowers are not required to put any of their own cash down when they buy a house. These loans put a larger amount of risk in the hands of lenders.
Stated income loan:
These mortgages also are known as “liar loans” because borrowers do not have to document their income. The temptation here, for borrowers and loans officers, is to inflate income to qualify for a mortgage.
Originally designed for rich people, these loans are mass-marketed to people who can’t afford to pay the interest and principal on a mortgage. But the interest-only feature lasts only for a fixed period. Then the homeowner has to pay interest and principal, typically at a higher interest rate, resulting in a higher monthly payment.
This type of mortgage features two loans. The first covers 80 percent of the home’s value and the second, usually at a higher interest rate, covers the rest. While this allows borrowers to avoid paying expensive private mortgage insurance for not putting 20 percent of their own money down, these mortgages have higher interest rates.
Source: Industry sources