L.A. Times: New mortgage deals aim to spur activity

Lenders clearly haven't felt enough pain yet to stop playing with fire. According to this December 2 story by Jonathan Diamond, even banks "not stuck with bad loans" are now offering what they think are less-risky mortgage packages to only the very credit-worthy.

One such product is a two-step mortgage, which totals 40 years. In the first 15 years, the borrower has the option of paying interest only, but the interest rate is fixed. The loan goes through a one-time adjustment and remains at a fixed interest rate for the remaining 25 years. This is being offered to jumbo borrowers.

Other lenders are also carrying 40 year loan products with the option of paying interest only. One lender says he is a "big fan of" such products even though they get "a lot of criticism."

The article goes on to state that the criticism stems from the fact that a payment jolt occurs when the switch is made between interest-only and interest plus principal. I think that misses the mark somewhat. When one is paying only interest on a house, they are only pretending to own the house. They are not accruing any equity.

And there are still lenders out there selling negative amortization loans. They offer teaser rates of 1% while the real rate is closer to 7%. What is new is that banks that haven't offered them are now offering them. That is why I said at the beginning that not enough pain has been dealt to the lenders yet for them to learn their lesson.

At least one finance professor at Claremont Graduate School isn't buying it. Jay Prag says that he doesn't think many people "fully understand the ramifications of sophisticated mortgage products...the more they tweak the product, it really isn't dealing with the problem: A lot of people believe they can own a house and handle the mortgage payments, and a lot just can't do that."