LOANS THAT MAY PROVE HAZARDOUS
With interest-only or payment-option plans, borrowers could fall into negative equity.
By Kenneth R. Harney, Washington Post Writers Group
WASHINGTON — They are the new breed of "affordability" mortgages, and buyers in high-cost markets can’t get enough of them: interest-only and "payment-option" plans that cut monthly payments sharply in the early years of a loan.
Lenders have marketed both types of mortgages aggressively — often to people who need to stretch their incomes to purchase — but have insisted that their borrowers have solid credit histories, excellent credit scores and fully understand the possible payment-shock risks once the monthly amount resets in a few years. In some parts of the country, the number of interest-only and payment-option loans has soared from single-digit market shares two years ago to more than 50% in 2005.
But federal regulators worry that all is not well: Too few borrowers, they say, really comprehend the potential risks or understand how the loans work.
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