Investors in the secondary mortgage market are beginning to question the unbridled growth of interest-only mortgages, 40-year loans, pay-option adjustables and other products designed to capitalize on the rapid run-up in housing prices.

Interest-only loans "have a place, but where we get nervous is their suitability to the borrower," Thomas Lund of Fannie Mae said at the Mortgage Bankers Association's National Secondary Market Conference in San Francisco earlier this month.

"Such loans may be appropriate for some borrowers, but they could prove disastrous for those who are relying solely on skyrocketing values" to build equity, Lund told the conference.

Borrowers are "not saving much" in the form of lower monthly payments "in relation to the potential for an upward adjustment" in their interest rate and monthly payments a few years into the mortgage, he warned. And the trade-off could prove disastrous if they can't afford to take the hit.

According to the MBA, 11 percent of all loan originations in the second half of 2004 were interest-only. And that's in addition to the 42 percent-share which were traditional and hybrid adjustable rate mortgages.

"It's big, it's too much," Chief Economist Douglas Duncan said in a hallway interview. "In some markets, the share is much higher than that." Donald Disenius of Freddie Mac said he also is beginning to worry about IOs, particularly when consumers use their mortgages to accumulate wealth through appreciation rather than amortization.

Ginnie Mae's Michael Frenz said Uncle Sam has "a lot of concerns" with the suitability of 40-year loans for low-income residents "in places which will never see the type of appreciation these products were designed for."

And William Batz, executive vice president of the Federal Home Loan Bank of Pittsburgh, said making interest-only and 40-year loans to some people could involve predatory lending.

"IOs may be suitable for the right market," he said, "but they could be characterized as predatory for the wrong borrower."

In their wide-ranging conversation, which was led by Nicolas Retsinas, the director of the Harvard University Joint Center for Housing Studies, four secondary market executives said that although they don't believe the rapid growth in house prices will last much longer, they weren't overly concerned about a so-called "bubble."

"If you want to see a real bubble, look at the dot-com bust. One company that was trading at $244 in 1999 closed recently at $1.40; that's a bubble," Batz said.

"I don't see the 'bubble' bursting on a national level, but I am concerned about some individual markets," said Lund, who is a senior vice president at Fannie Mae and the interim head of single-family mortgage business for the big secondary market agency.

He is most worried about East and West coast markets where investors account for 15-20 percent of the home sales and a large percentage of loans are interest-only adjustables. The double-digit growth in home prices in these places is "not sustainable," he warned.

Disenius, who is senior vice president for credit policy and portfolio management at Freddie Mac, agreed. "Most markets are in reasonable balance," he reported. He also expects price appreciation to begin slowing soon. "We've squeezed about all we can" out of innovative mortgage products, he observed.

Frenz warned, however, that prices could tumble in some markets. Which ones? Those where houses are trading at higher prices on the same day and where buyers are saying, "this time it's different." Those, he said, are "sure signs" of a housing apocalypse.

The panelists also suggested that the mortgage business is finally ready to turn its full time and attention to undeserved markets.

"We've been talking about the changing markets since the mid-'90s, but we've been too busy dealing with refinancing booms to do much about it," Lund told the meeting. "Now it's finally happening."

However, Batz suggested that the lenders have a long way to go in meeting the needs of low-income and immigrant borrowers. "We still don't have the products to meet their needs," the FHLB executive said. "The existence of predatory lending is an indication of that."

Mr. Disenius said the issue isn't that more products are needed. Rather, the challenge is putting borrowers into the right ones.

"The products are there," the Freddie Mac official said. "We just need more counseling and consumer education."

Published: May 25, 2005

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.