Few of the nontraditional home loans that triggered the financial crisis are still available, and lenders will have even more reason to avoid them now that the Consumer Financial Protection Bureau's definition of presumably safe and sound mortgages is in effect.
But even though the CFPB's so-called qualified mortgage standard became official on Friday, one type of loan it excludes — the interest-only mortgage — will remain a common offering for a certain category of borrower: well-off buyers of expensive homes.
Many banks that lend in high-end California markets plan to keep making these loans for affluent clients who want them. Often these are self-employed people capable of maintaining fat bank accounts while making sizable down payments, borrowers the banks say could afford traditional loans but want to maximize their cash available for other investments.
"Our risk group did an extensive review, analyzing performance by loan type," said Wendy Cutrufelli, vice president of mortgage sales at San Francisco's Bank of the West, which announced this week that it would continue to make interest-only loans.
“They came out on the back end and said we’re good on interest only — you can continue to offer them.”
Because borrowers don't pay down the principal on such loans, payments are lower for as long as the interest-only period lasts. The downside is that borrowers face far higher payments when that period expires, typically after five or 10 years, but the banks say that by their determination that is not a problem for well-to-do borrowers.
No one disputes that interest-only loans contributed to the mortgage meltdown. Like loans with initial "teaser" interest rates, and pay-option mortgages that allowed the balance to rise instead of fall, they were mass-marketed as affordability products during the housing boom, then soured in large numbers when it turned out borrowers couldn't or wouldn't pay them in the long term.
"Reason and sound judgment were absent when many banks and other mortgage businesses lent to consumers without even considering whether they could pay back the money," CFPB Director Richard Cordray said at a hearing Thursday in Phoenix. "The supposedly rational market had become wildly irrational."
But interest-only loans made to wealthy borrowers have generally held up well, and many bankers have continued to write them for the jumbo mortgage market — loans too large for sale to Fannie Mae and Freddie Mac, meaning more than $625,500 in expensive areas such as much of California.
Some lenders, like Bank of the West, offer mortgages with an initial interest-only period to borrowers who need smaller loans. But most such borrowers don't have the large down payments and hefty reserves of cash or liquid assets that are now standard for interest-only loans. Cutrufelli said Bank of the West, a unit of France's BNP Paribas Group, writes only a handful of them.
"These types of loan products are typically sought out by affluent borrowers who meet strict qualifying standards," Stuart Bernstein, executive vice president for consumer lending at Union Bank, said this week.
San Francisco-based Union, a subsidiary of Japan's Mitsubishi UFJ Financial Group, has offered interest-only loans for more than a decade, including a popular type of jumbo loan that has the rate fixed for the first 10 years before borrowers must start paying down the balance. Union will continue offering the loans to borrowers who can qualify, Bernstein said.
Other banks that will continue to offer jumbo interest-only loans include Wells Fargo, Bank of America, JPMorgan Chase and City National. The latter makes a point of emphasizing to analysts how its portfolio of jumbo mortgages, including interest-only loans, experienced nearly no defaults during the housing bust.