Interest rates have started to rise, and the housing market is cooling off, a combination that is putting a squeeze on mortgage lenders. Now, some of them are turning to more complicated loans, a remnant of the last housing boom, to bolster their business.
These risky offerings fall under the umbrella of non-qualifying loans, meaning they do not conform to standards set by the Consumer Financial Protection Bureau. But lenders are starting to push the loans on borrowers, who are using them to get into homes that may be bigger and more expensive than what they could otherwise afford.
One popular loan is the interest-only adjustable rate mortgage, with which a borrower pays only the interest for a period before the rate resets and principal becomes part of the payment. Another is the income verification or “ability to repay” loan, tailored to a borrower who does not have regular wages but is paid in large chunks of money — for example, from an investment partnership.
These types of loans may be a good strategy for a wealthy home buyer, but some say they still carry the taint of overeager and unscrupulous brokers who pushed them on borrowers unable to repay them, creating a bubble in the housing market that burst in 2008.
“All of these types of loans make anyone who is in this business cringe,” said Tom Millon, chief executive of Capital Markets Cooperative, a network of 550 small mortgage lenders and servicers.
Still, lending standards are higher, he said.
“We’re not talking about the no-asset, no-income, no-verification loans,” he said. “We’re talking about someone with a nontraditional income source that’s verified six ways to Sunday.”
Yet the slowdown in mortgage underwriting has pushed lenders to look at alternative loans, Mr. Millon said. “We all have time on our hands because business is so slow,” he said.
Banks and mortgage providers are careful to say they are marketing these products only to qualified borrowers. But the offerings can be hard to understand.
Tonaus John, chief operating officer of DBC Real Estate Management, recently moved to Pittsburgh for work. He and his wife bought a 4,000-square-foot home in Franklin Park, a suburb where they felt they could put down roots for their twin first-grade daughters.
“I fell in love with the house,” Mr. John said. “We saw it, put in an offer and closed in less than 30 days.”
He used an interest-only adjustable-rate mortgage to buy the house, which cost about $1 million. He looked at traditional fixed-rate loans as well, but the interest-only loan was half a percentage point lower, with the rate locked in for 10 years.
“I calculated that I was going to save $25,000 on the adjustable-rate mortgage,” he said. The possible increase in interest at the end of 10 years was capped at 5.25 percentage points. “The worst it could be was 8.75 percent, and saving $25,000, I could put that money somewhere else.”
The family’s plan, Mr. John said, is to make principal payments in addition to the interest, with the goal of reducing his mortgage faster than he would with a 30-year…