The second-largest provider of U.S. mortgages through brokers is bringing back a debt type that's almost disappeared since the financial crisis: Interest-only loans.
United Wholesale Mortgage plans next month to expand access to the mortgages to borrowers beyond the wealthiest Americans who use so-called jumbo loans. Interest-only mortgages carry higher risks because they can leave homeowners facing a jump in their bills down the road.
The move by the family-owned lender, which grew more than 40-fold after the crash by working with brokers as banks such as JPMorgan Chase & Co. abandoned them, is the latest sign of how lending standards are expanding in the wake of the crisis.
Mat Ishbia, the Troy, Michigan-based company's chief executive officer, said he isn't embracing a return to misguided practices.
"It's for a savvy borrower who can afford the higher payment but chooses the lower payment," said Ishbia, whose firm lost business before the slump by failing to offer risky loans such as subprime mortgages. "People that don't know the industry are just so focused on what happened and bad things definitely happened. But we're doing things the right way."
That includes only lending to borrowers who can qualify based on what their payments eventually could be, not where they start. Home buyers will need to put down 20 percent, have credit scores of 720, and their eventual payments can't exceed 42 percent of their income.
The debt, which will have interest rates that start to adjust after five years, requires borrowers to begin paying down the loans after 10 years.
Based on conditions last week, the mortgage would come with an initial rate that's about 0.75 percentage point higher than a five-year adjustable-rate mortgage and in line with a 30-year fixed, Ishbia said.
On a $300,000 loan, that translates to monthly costs of $1,031 versus $1,326 or $1,454. Assuming no change in rate on the interest-only loan which can climb as much as 2 percent annually and 5 percent total payments jump to $1,838 after 10 years.
Before the crisis, lenders often would assess a borrower's ability to repay nontraditional loans based on their initial payments. Regulators banned the practice for banks, but not others, in late 2006. The Consumer Financial Protection Bureau cracked down harder with new regulations last year.
Even with the rules, there's growing evidence that interest-only mortgages are poised for a wider comeback as home prices jump.
Fenway Summer's Ethos Lending unit is expecting to introduce an interest-only product next quarter, said Raj Date, who founded the company in 2013 after serving as CFPB's first No. 2 official. He agreed that borrowers must be able to afford the debt for the long-term.
"It's one thing to give someone the flexibility associated with an interest-only loan," Date said. "But it's another thing to act as if the payment is never going to get higher."
Several community banks also offer interest-only mortgages outside the jumbo market, said David Lykken, a partner at consultant Mortgage Banking Solutions. And EverBank Financial Corp. offers home-equity lines of credit of as little as $250,000 for property purchases that require just interest-only payments during periods in which more funds can be drawn, said Kipin Alexander, a spokeswoman for the lender.
Aggressive sales of "nontraditional loans that were unsuitable" devastated borrowers and helped fuel the housing slump, said Kevin Stein, an associate director at the California Reinvestment Coalition. That's one reason why home buyers need access to nonprofit counseling, he said.
"It may be that there are some borrowers for whom these products make sense," Stein said in an e-mail. "But there are many for whom it does not."
United, which expects to originate about $14 billion of mortgages this year, sees interest-only loans helping borrowers who would rather invest or save some of the money that they could be putting toward their loans, Ishbia said.
His firm has lined up two companies to buy the loans that it makes through its network of 5,000 brokers, including one "Wall Street" firm, he said. Ishbia isn't interested in creating other types of loans that buyers are starting to seek.
Unlike some rivals, it won't be offering loans to borrowers who are just a day out of foreclosures, he said. While such mortgages can require down payments of 30 percent or more, protecting investors, they aren't necessarily appropriate, he said.
"That's old school thinking," Ishbia said. "If people put profit ahead of what's best for borrowers, they're going to end up in trouble."