Banks embracing a housing-bubble favorite: interest-only loans

[Norm dePlume]

"Come here, Norman. Hurry up. The loons! The loons! They're welcoming us back."
- Ethel Thayer in On Golden Pond

Banks embracing a housing-bubble favorite: interest-only loans

Customers for interest-only loans are often self-employed and capable of making big down payments and maintaining fat bank accounts.

Most of the risky mortgages that triggered the financial crisis have disappeared from the marketplace, and lenders will have even more reason to avoid them because of a new federal crackdown on loose lending.

But one housing-bubble favorite — the interest-only loan — will remain a common offering to well-heeled home buyers, despite new rules from the Consumer Financial Protection Bureau. The rules, which took effect last week, exclude interest-only loans from "qualified mortgage" status, which protects lenders from liability over defaults.

Bankers don't seem worried about affluent clients missing payments. With high-end home prices on the rise, they have recently embraced jumbo mortgage lending, including interest-only mortgages. That trend continued this week as the banks reported earnings, with Bank of America Corp. saying 36% of its fourth-quarter mortgages were jumbo loans, up from 23% of originations in the first quarter.

[Adam]

Too bad the LAT is too interested in fanning flames of class warfare to bother nothing what the actual purpose of interest-only loans is.

I do get a kick out of people who like to pretend that interest-only loans are somehow new or inherently risky.

[Norm dePlume]

Too bad the LAT is too interested in fanning flames of class warfare to bother nothing what the actual purpose of interest-only loans is.

Okay, why don't you tell us what the actual purpose is.

[Adam]

Okay, why don't you tell us what the actual purpose is.

Investment, and occasionally for spec-construction. There's a reason why these loans usually have a two-year term before the principal starts coming due: that's how long one has to hold onto a house before re-selling it to avoid capital gains.

[Norm dePlume]

Investment, and occasionally for spec-construction. There's a reason why these loans usually have a two-year term before the principal starts coming due: that's how long one has to hold onto a house before re-selling it to avoid capital gains.

So they aren't for people who are buying a home to live in?

[Norm dePlume]

So, it's usually only a two-year term before the principle starts coming due, right?

Fixed-rate interest-only loans

Note: Bank of America offers the interest-only payment option on jumbo loans only.
Fixed-rate interest-only loans have a 30-year term and an initial time frame, usually 10 years, during which you can choose to make interest-only payments or both principal and interest payments. This means the initial payments are comparatively low, allowing you to use the balance of your cash flow for other immediate needs. At the end of the interest-only period, you will be required to pay both interest and principal so the outstanding balance will be paid in full over the remaining 20-year term of the loan.

I guess the investor plans on having these homes on the market for a really long time.

[Adam]

So they aren't for people who are buying a home to live in?

Depends upon one's situation. There is on one-size-fits-all answer, just like there's no one-size-fits-all loan product.

[Norm dePlume]

Depends upon one's situation. There is on one-size-fits-all answer, just like there's no one-size-fits-all loan product.

Ah, so there is no one-size-fits-all actual purpose for interest-only loans. No wonder the LA Times didn't bother noting one.

The actual purpose is to make the payments lower for the interest-only period. And the inherent assumption that makes it work is that the house is presumed to increase in value during that period.

[Adam]

So, it's usually only a two-year term before the principle starts coming due, right?

Not exactly. I probably stated that inartfully. It would have been clearer to say that most interest-only loans only exist over about a two-year term, or a little longer, so that someone can complete construction, renovation, whatever and then sell while avoiding the capital gains tax.

I guess the investor plans on having these homes on the market for a really long time.

You should consider reading your own link instead of being so incredibly focused on trying to pull off a "gotcha:"

Interest-only loans tend to appeal to people whose income fluctuates (those who are self-employed, on commission or on a bonus schedule) or who expect to own their home for a short period of time.

In other words, investors.

[Norm dePlume]

Not exactly. I probably stated that inartfully. It would have been clearer to say that most interest-only loans only exist over about a two-year term, or a little longer, so that someone can complete construction, renovation, whatever and then sell while avoiding the capital gains tax.

You should consider reading your own link instead of being so incredibly focused on trying to pull off a "gotcha:"



In other words, investors.

Everyone who purchases a home is an investor. And the "gotcha" was about the interest-only period (which you were perfectly clear on, just wrong).

[Adam]

You're right, Norm. We should just eat the bankers.

[Norm dePlume]

You're right, Norm. We should just eat the bankers.

If you pick the right banker, that might get you a better interest rate, but that's your call. I'd settle for making sure they keep these loans on their own balance sheets and maintain some reasonable capital requirements.