Huge loans remained as foreclosures spiked

McLEAN, Va. – Feb. 26, 2009 – About 9 percent of homebuyers in 2007 borrowed an amount at least four times greater than their annual income, according to an analysis of lender data by USA Today.

Lenders don’t usually consider the size of a loan relative to total income, says Margot Saunders of the National Consumer Law Center, but that constituted a major mistake while writing adjustable-rate loans where consumers can face sharp increases in monthly payments. “It is like jumping off a bridge without knowing how high it is, and certainly without a parachute,” Saunders says.

Data from the Federal Financial Institutions Examination council shows that big loans were most common in East and West Coast cities. Mortgage Bankers Association Chief Economist Jay Brinkmann dismisses the analysis saying there is nothing inherently wrong with loans that are larger than a borrowers’ yearly income. In parts of the country where home prices spiked, “that was what you had to pay to get into a house,” he says.

Source: USA Today, Brad Heath (02/25/2009)

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