Chicago, IL (PRWEB) January 28, 2014
The Los Angeles Times recently reported that banks are once again embracing Interest Only mortgages. To many this is unexpected since Interest Only mortgages were stigmatized as toxic loans that helped cause the 2008 Financial Crisis. Before you say – “Here we go again” – consider that Interest Only Loans (IO for short) are still a useful financial resource for the right borrower. What has changed between the IO loans of 2008 and the IO loans of 2014? Many things have changed, but the two biggest changes are the Consumer Finance Protection Bureau (CFPB) and the Qualified Mortgage rules.
On January 10, 2014, the CFPB implemented the Qualified Mortgage (QM) rules. The QM rules are very complex with many stipulations but, for the sake of brevity, the central features of the QM rules are the “Ability To Repay” and “Risky Loan Features”. Under the Ability to Repay (ATR), lenders are prohibited from making any loans without verifying and documenting the borrower’s ability to repay the loan. If a loan program contains a “Risky Feature”, such as an Interest Only payment, then the lender is under heightened responsibility and scrutiny to verify the loan is suitable for the borrower’s financial needs and they possess the ability to repay the loan.
The lender is required to provide extensive disclosures outlining the details of the mortgage. The borrower must sign and acknowledge the disclosures validating they understand the risks inherent in an Interest Only loan. Copies of the signed disclosures, along with underwriting worksheets, are to be maintained in the loan file and readily available to regulators justifying the lender’s decisions. All this additional paperwork adds time and costs to originating an IO loan but will safeguard borrowers and lenders.
IO loans are not for everyone but can be a useful financial resource for the right borrower. In the past, these loan programs were mass marketed to the general public as suitable for all borrowers and real estate transactions when they should have been reserved only for the appropriate borrowers that were well qualified. This created a mismatch between borrower and loan program – the wrong borrower with the wrong loan program can be – and was – for many borrowers calamitous.
When Interest Only loans were stacked with other risky features like below market “teaser rates” and negative amortization, a toxic cocktail was created with disastrous results. Lenders today have learned from the past mistakes and eliminated the risk layering when designing today’s IO loans. The specifics of different Interest Only mortgage programs vary from lender to lender and small differences can have a huge impact on monthly payments and the borrower’s ability to repay. That is why http://www.MortgageElements.com is a valuable tool for Mortgage Brokers, Loan Officers, and other Mortgage Professionals to research the specifics of different Interest Only mortgage programs from various lenders to find the right features appropriate for their borrower’s needs.
About Mortgage Elements Inc.
Mortgage Elements Inc. is an internet marketing company that provides marketing, database, search, and consulting solutions for the mortgage industry through its website http://www.MortgageElements.com. The company uses a unique website design optimized for touch screen technology and use on mobile devices, desktop, and laptop computers. Mortgage Elements is a B2B company for the mortgage industry and not a lender.