It must have seemed like a good idea at the time: Not only could you get 100 percent financing for your home, you could do better -- 110 percent, 125 percent, and sometimes even more. If you bought or refinanced a $200,000 home you could borrow $220,000, $250,000, or perhaps a higher figure.

Such loans were generally sold with the thought that in the best case the additional money could be used to pay off credit card debt, buy a new car, start a new business, pay for college or whatever.

And why worry about repayment? After all, money from rising stock values and appreciating homes could be used to pay off the debt. In the best case, no cash other than monthly payments would ever come from the borrower.

Oh well, whoops.

The presumptions which powered what I call "super-jumbo" loans (and what lenders generally call "high-LTV" financing) are about to be challenged in a big way. What's going on is not a by-product of the September terrorist attacks, but rather the predictable, expected, typical, usual result of mainstream economics: There are good times and there are slow times. We are now at the cusp of a slow period.

To obtain 125 percent financing a lender has to believe that the borrower can repay the loan at some point. If homes appreciate at 5 percent a year, then a home which now sells for $200,000 will be worth $255,256 in five years. Given that most homes are owned for more than five years and also that 5 percent appreciation has not been unusual in many areas during the past decade, the lender's risk is not great. Moreover, super-jumbo loans imply more risk so lenders have been able to obtain above-market interest rates.

At this point we have a happy borrower and an ebullient lender.

But with the economy slowing, super-jumbo loans are suddenly much more risky.

• Given lay-offs and a recession, home prices are not rising as quickly as in the past and in some areas are falling.

• In terms of taxes, the amount above the value of the property may be regarded as "excess" mortgage. The "excess" amount may be taxable when the home is sold.

  Also, interest on that portion of the financing which tops the property's fair market value may not be a write-off. See a tax pro for specifics.

• If you need to move and the value of the home is less than the loan balance you'll need to bring cash to closing. If you don't have the cash, some lenders will place a lien against your new home for the shortage. Alas, some lenders won't.

• If the idea of a bigger mortgage was to pay-off credit card debt it might be possible to substitute high-cost debt for less-expensive obligations. But if credit cards were paid off and new credit card debt was created, the borrower now has both a super-jumbo mortgage and credit card debt.

• Big monthly payments are sustainable at a time of wage increases, bonuses, and credible stock options. But when the economy slows, big payments may seem crushing if not overwhelming.

It's hard to imagine that some number of super-jumbo borrowers are not among the financially distressed -- or soon will be. And it's easy to see that super-jumbo loans will be a source of losses for many lenders.

It's good to test the boundaries of convention, to see what works and what doesn't. But given the economic slow-down we now face, super-jumbo loans are unlikely to be a common loan option in the coming months.

For more articles by Peter G. Miller, please press here.

Published: October 24, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .