Freddie Mac, the second-biggest provider of financing for U.S. housing, said that it will expand its interest-only payment option to more adjustable-rate home loans to meet demand from borrowers.
The 10-year interest-only period will be allowed with hybrid adjustable-rate mortgages that have fixed rates of interest for set terms of three, five, or seven years, Freddie Mac said Thursday. Freddie Mac already allows the 10-year interest only period on hybrid adjustable-rate mortgages with a fixed rate of interest for 10 years.
The adjustable-rate, 10-year interest-only mortgages are for "savvy borrowers," David Stevens, senior vice president of mortgage sourcing, said in the statement.
Growth of adjustable-rate and interest-only mortgages has boosted the number of securities issued to investors directly from lenders, instead of government-chartered companies Fannie Mae and Freddie Mac. In the third quarter of 2004, the volume of securities issued by private label issuers for the first time topped that of Fannie Mae, Freddie Mac and Ginnie Mae, according to Fannie Mae.
The 10-year interest-only mortgages present risks to investors because they are popular with consumers who are stretching financial resources and might not be able to repay the loans when interest rates rise, said Scott Simon, a managing director at Pacific Investment Management Co. in Newport Beach, Calif.
Borrowers are at risk of paying about 40 percent more when the rates are reset in two years, he said.
Interest-only mortgages are "designed for borrowers who fully understand that the monthly payment will rise following the interest-only period," Freddie Mac said in the statement.