Does The Return Of Interest-Only Mortgages Mean Lenders Are Sliding To Pre-Crisis Habits?

United Wholesale Mortgage (UWM), the second-largest U.S. provider of mortgages through brokers, recently announced that it will once again be expanding access to interest-only mortgages. Benzinga had the chance to speak with UWM CEO Mat Ishbia about the change in policy and whether it is indicative of a dangerous trend in U.S. lending habits.

What Is An Interest-Only Loan?

When a borrower gets an interest-only loan, he or she must make only the interest payments on the principle balance for a set period of time. For a U.S. mortgage loan, this time period is typically five or ten years.

What makes interest-only loans particularly risky is that the borrower’s monthly payment often makes a large jump at the end of the interest-only period when he or she must begin paying down the principle of the loan.

Related Link: 4 Top-Performing Mortgage REITs Rose Sharply On This Sector Upgrade

Reckless Lending?

Prior to the Financial Crisis, many banks were recklessly making interest-only loans by determining only the borrower's ability to make the initial interest-only payments. Benzinga asked Ishbia how UWM’s new interest-only lending program is different from irresponsible mortgage lending responsible for the crisis.

“The purpose of the program is not to enable a consumer to afford a larger house; it’s for someone who can afford the house on a 30-year fixed mortgage, but chooses the interest-only option to save additional discretionary income each month,” Ishbia explained. He added that the UWM interest-only program is very conservative and that all interest-only borrowers must pay make a down payment of at least 20 percent and have credit scores of at least 720.

In order to qualify for a UWM interest-only loan, borrowers’ eventual payments also can’t exceed 42 percent of income.

Related Link: Bankrate: Mortgage Rates Ease Amid Market Tensions

Long-Term Decisions

Although UWM’s policies seem to be a far cry from the type of dangerous mortgage lending that was rampant prior to the Financial Crisis, the return of interest-only loans could lead to a slippery slope in lending practices.

While Ishbia couldn’t speak directly to the policies of other lenders, he pointed out that UWM has a 29-year track record of responsible lending. He also added that there is nothing inherently irresponsible about interest-only lending.

“Those companies that are bringing back interest-only programs, like UWM is, are looking at it conservatively to ensure that borrowers’ best interests are at heart,” Ishbia assured Benzinga.

Image Credit: Public Domain
Market News and Data brought to you by Benzinga APIs
Comments
Loading...
Posted In: EducationTop StoriesExclusivesInterviewMat IshbiaUnited Wholesale Mortgage
Benzinga simplifies the market for smarter investing

Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.

Join Now: Free!