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NAR-CRL Brochure Advises Buyer Caution with Specialty Mortgages

Thursday, August 18, 2005

WASHINGTON, D.C. — Homebuyers may not realize that monthly payments on some types of specialty mortgages can increase by as much as 50 percent or more when the introductory period ends. That's one of the messages that the National Association of Realtors® and the Center for Responsible Lending are trying to drive home in "Shopping for a Mortgage? Do Your Homework First," a new brochure to inform homebuyers about the risks and advantages of specialty mortgage products.

The publication is part of a new NAR consumer education campaign addressing specialty loans and abusive lending practices. The brochure helps consumers understand conventional loans such as fixed rate and adjustable rate mortgages, and more exotic loan programs, including interest-only mortgages, 40-year fixed-rate mortgages, negative amortization mortgages, and option payment adjustable-rate mortgages.

"The growth of the specialty mortgage market has helped many borrowers finance the American dream of homeownership, but these mortgages come with risks," said NAR President Al Mansell of Salt Lake City. "Consumers are susceptible to loans with monthly payments that can spike dramatically, or that actually increase the amount they owe on their home. Homebuyers should consult with a Realtor® to learn about different financing options and their implications over time."

"We're warning homebuyers to approach these new mortgages carefully," said Mike Calhoun, general counsel of the Center for Responsible Lending. "They should be cautious about accepting a mortgage they can't afford. These mortgages can be devastating for families who are stretching their budget to buy a home."

David Lereah, NAR's chief economist, said, "Consumers particularly need to understand the risks inherent in specialty mortgages when financing a home purchase. The National Association of Realtors® is committed to giving our Realtor® members the tools and knowledge essential for their customers' success." Because homebuyers turn first to Realtors® for advice on the real estate transaction, NAR is making the brochure available online to all of its 1 million-plus members at www.realtor.com. Buyers can ask their Realtors® for a copy or can access the brochure on NAR's consumer Web site at www.realtor.com. The brochure also is available through the Center for Responsible Lending at www.responsiblelending.org.

The State of the Nation's Housing 2005, issued by The Joint Center for Housing Studies of Harvard University, cites information from Loan Performance indicating that one in four home loans in 2004 was financed with an interest-only mortgage. Three years ago, these mortgages comprised only a few percentage points of the total mortgage market.

In testimony before the U.S. House of Representatives Committee on Financial Services on July 20, Federal Reserve Board Chairman Alan Greenspan expressed concern about the "increase in the prevalence of interest-only loans and the introduction of more exotic forms of adjustable rate mortgages." He suggested that some homebuyers may be using these loans to buy houses that they might not otherwise afford, and warned that lenders should "fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change."

In May, NAR's Board of Directors approved launching a new consumer education campaign through its membership to help consumers avoid the pitfalls of predatory lending practices that often threaten potential homebuyers with credit problems and, possibly, the loss of their home. The campaign aims to develop standards that balance the need to keep credit available for borrowers with less than perfect credit while avoiding abusive lending practices that put homebuyers at unnecessary risk.

The National Association of Realtors®, "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.

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Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the Web site's "News Media" section in the NAR Media Center.

Contact: Michael Flagg at 202-349-1862 or mike.flagg@responsiblelending.org