It’s back to the future. United Wholesale Mortgage, a successful wholesale lender, is rolling out its new Interest Only loan program. UWM’s CEO, Mat Ishbia touts that it will be, “…a significant boom for mortgage originators”. (The New I/O). Maybe a boom for originators but will it be a return to problems for consumers and the industry?
We traveled this road before. An interest only feature in a mortgage is not in and of itself a bad thing, but it does create some additional risks. The risks for the consumer are that they may not pay down their loan, nor wisely invest the initial savings. The risks for the lender and note holder are that the borrower can’t afford the full payment, down the road. What if the market turns, as it did in the past, and the consumer quickly end up owing more than their home is worth? Can you say short sale?
Not to beat a dead horse (and no I don’t beat any horses), it’s important that any lender originating these loans take the time to carefully review the applicant’s ability to repay (novel idea). Not to repay the interest only payment but the full payment based on the terms of the loan.
The IO feature should not be used to qualify a borrower at the lower payment. That is asking for trouble. Nor should it be used for first-time buyers unless they have some positive hands-on experience with investing.
The interest only feature is a benefit when the borrower uses the savings to invest at a higher rate of return than what they may have realized in their property’s appreciation. Now may be a good time since properties are no longer rising at rates of 15 to 20% per year (yet).
Otherwise, when it comes time to make the full payment, they may struggle handling the increase. Especially if they have become comfortable paying at the lower I/O payment while using the savings to cover other living expenses.
Like any loan program, Interest Only loans may be a boom for originators and good for the industry as long as they are handled properly. Quality and compliance are the keys to success. Loans made with an eye toward performance and longevity, not for the quick buck. When done the right way, they will help originators, wholesalers, and end investors, as well as consumers. Let’s all hope so.
Unfortunately, only time will tell. Good luck UWM, we’re pulling for you.