Copyright (c) 2005, 
Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.WASHINGTON -- The National Association of Realtors warned home buyers about the risks of mortgages that offer low initial payments, so-called "affordability" loans that have helped push house prices higher.
The real-estate trade group joins Federal Reserve Board Chairman Alan Greenspan and bank regulators who have been speaking out recently about the possibility that these loans could lead to an increase in defaults. But the Realtors' warning is particularly striking because affordability loans help realtors sell homes in high-cost areas to people who couldn't otherwise afford them.
In a press release, the Realtors said home buyers "may not realize that monthly payments on some types of specialty mortgages can increase by as much as 50% or more when the introductory period ends." The Realtors have teamed up with the Center for Responsible Lending, a nonprofit group, to create a brochure offering advice on choosing a mortgage.
The mortgages in question include interest-only loans with rates that adjust periodically based on fluctuations in an interest-rate index. Another increasingly popular type of loan is known as an option ARM, or adjustable-rate mortgage. Borrowers have several payment options each month, including one that falls short of even the interest due. When borrowers select that option, their loan balances grow, a phenomenon known as "negative amortization."
These loans are particularly popular in California and other places where home prices have soared. The danger is that homes will be harder to sell and loans more difficult to refinance if the housing market droops.
Al Mansell, the Realtors' president, said these loans are fine for some people who can easily handle higher payments later but "they may be getting over-marketed and oversold."
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