Joining the dirgeful chorus lamenting the risky business of easy mortgage money, Consumer Reports says many home buyers and owners are banking home ownership on loans that increase their odds of foreclosure.

Ever more popular because they allow home owners repeated returns to the equity till and buyers to purchase homes that might otherwise be unaffordable, the home loans come with dangerous levels of risk that could quickly become unmanageable.

Foreclosure reports recently revealed fewer defaults and foreclosures, but Consumer Reports says that's because the loans are relatively new. The independent consumer advocate harps on recent government, industry and independent warnings that reveal more and more consumers are strung out on the loans, especially in high-cost areas including California and Nevada where recently more than half the loans originated are considered the riskier variety.

The consensus of concern points to the potential for the economy to push low interest rates higher at the same time an unsustainable rise in foamy home prices loses air -- a double whammy that could turn the tide on foreclosures.

Combine the growing addiction to risky loans, higher interest rates and falling home prices. Toss in what the Federal Bureau of Investigation says is "organized criminal groups and individuals engaged in significant financial institution fraud ... including mortgage fraud." Include the Mortgage Asset Research Institute's (MARI) recent testimony before Congress about spreading levels of mortgage applicant fraud.

It's getting so the bubble analogy doesn't quite hit the mark.

Rather than the hiss of losing air or a louder pop from sudden deflation, the housing market looks more and more like a powder keg bristling with short fuses.

"These days, it can be easy to get a mortgage even for a home that seems financially out of reach. And homeowners can tap home-equity loans to finance everything from a Lexus to a trip to Las Vegas. But this is not such a good thing," says Consumer Reports.

"Many loans that mortgage brokers and lenders are pushing increase the odds of foreclosure by allowing borrowers to accept more risk than they can manage, especially if home prices level off or if interest rates increase," Consumer Reports reveals in "Beware Of These Home Loans".

The Mortgage Bankers Association reports delinquencies, defaults and foreclosures remain low now because many of the loans are relatively new, introduced specifically to address the escalating cost of homes.

Also, interest rates have remained low with less than half a percentage point separating this year's high and low points.

Those conditions, says Consumer Reports, gives consumers plenty of time to get out of or avoid high risk loans.

The loans that most concern the consumer goods and services rater are:

Interest-Only (IO) Mortgages

Interest-only loans allow borrowers each month to pay only the interest for a period, typically 3 to 10 years. After the initial period, unless the borrower has elected to pay down the principal, the original principal remains intact and when it's added to the equation (same principal-shorter term), monthly payments can jump 25 percent, Consumer Reports warns.

Because many of the loans initially come with artificially low adjustable rates (which allow consumers to buy more home or a home they couldn't otherwise afford) consumers could get smacked twice with principal payments and a higher interest rate at a time when it may be difficult to find a cheaper loan as a way out or sell the property. If the home owner hasn't paid down the principal and home prices have slipped, the loan could flip upside down with a balance larger than the home's value.

IOs were identified by the Federal Reserve as a troublesome fixture in the home equity portfolios of a growing number of lenders. The finding prompted the reserve earlier this year to issue a warning about the practice, "Credit Risk Management Guidance For Home Equity Lending".

Option-Adjustable Rate Mortgages (O-ARMs)

Option ARMs leave it up to the borrower to decide on the payment level each month. If that doesn't cover the interest payment, the mortgage balance can grow. An initial study by a private lender revealed that more than half its borrowers with O-ARMs were taking the riskiest approach and paying the bare minimum each month.

Borrowers who opt for these option loans may find them a great leveraging tool, especially for investment purchases. However, use of the mortgage could also indicate the buyer can't really afford the full monthly payment and is gambling that will change in the future.

If the loan balance rises to 110 to 115 percent of the original loan, the borrower is behind the eight ball trying to pay down the balance. An upside down mortgage and income that can't keep up is a recipe for financial disaster.

Piggyback Loans

Consumer Reports' August warning about risky loans piggybacks on the PMI Group's recent study, "The Hidden Risks Of Piggyback Lending".

Both warn that the loan is inherently risky. Piggyback loans get their name from a second mortgage that is "piggybacked" onto a first mortgage to compensate for buyers unable to come up with a larger down payment or any at all. The loan helps the buyer leverage the transaction and avoid paying private mortgage insurance. It also could be a red flag the borrower wasn't financially ready to buy a home.

If the loan is adjustable, the stakes get higher in this game of mortgage roulette. Piggybacks are also available as home-equity lines of credit, with interest-only features, compounding the rate of potential risk.

In all cases borrowers are often told they can refinance at the end of the initial low-monthly-cost period and reduce their risk. But combine the cost of refinancing, the potential for higher interest rates and the possibility the home won't appraise to cover any extra loan amounts and it's all a real crap shoot.

Consumer Reports says unless you can truly handle the risk, don't shoot yourself in the foot. Bite the bullet.

"With today's low interest rates, the best option for most buyers is still a 30-year fixed loan."

Published: August 2, 2005

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.