Expert says some loans 'designed to fail'

Feb. 25, 2009 at 1:01 PM
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WASHINGTON, Feb. 25 (UPI) -- U.S. lenders approved mortgages "designed to fail" with at least 9 percent of the loans approved in 2007 falling into that category, a finance expert said.

In the most recent year with records available, banks approved 419,000 mortgages in 2007 that were four times the annual income of the borrower, USA Today reported Wednesday.

"It's the continuation of loans that were clearly designed to fail," said Susan Wachter at the University of Pennsylvania's Wharton School of Business. "In 2007, we were clearly about to go into a disaster, but … the loans were still being written."

The average loan approved in 2007 was for double the size of the borrower's annual income, the newspaper said.

However, adjustable rate mortgages can sneak up on borrowers.

Not realizing how high an adjustable rate mortgage can go is "like jumping off a bridge without knowing how high it is, and certainly without a parachute," Margot Saunders at the National Consumer Law Center told USA Today.

Mortgage Bankers Association Chief Economist Jay Brinkmann said low interest rates can allow a borrower to find a loan far larger than the borrower's annual income.

With home prices high "that was what you had to pay to get into a house," he said to the newspaper.

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