I got a note this morning from David Maiolo, a mortgage broker I spoke to for my story on risky loans last week, pointing out an important distinction about the loans that are worrisome in today’s market. Some of the reports he’s read of the current worries of mortgage investors have incorrectly lumped all high-risk loans into the subprime category, and that incorrectly simplifies the issue, he said.
High-risk loans are not necessarily subprime (made to borrowers with poor credit), he said. High-risk loans are chosen sometimes by borrowers with excellent credit, and include option adjustable-rate mortgages and stated-income mortgages, where borrowers claim how much they make on their application and don’t have to submit verification.
This is a good distinction to make, because there will be a lot of people who took out the risky, interest-only or negative-amortization loans who will still be able (because of good credit) to refinance or make other moves to hang on to their homes when their payments increase.
I don’t think there are too many lenders offering Option ARM loans to sub-prime customers (some, perhaps, but not many), but there are plenty of Stated Income products available in sub-prime. That’s pretty risky.