Actually, of all of the “innovative” loan products of the last few years this is one of the least objectionable. Recall that with a typical 30-year fixed rate loan, the borrower only pays down about 15% of the original principal balance in the first 10 years. Consequently, it’s only that 15% or so that gets amortized – in effect – into the total monthly payment over the last 20 years of the loan. So, while there is a little bit of payment shock in year 11, it’s not very dramatic, especially in comparison with most of the other crazy products out there. Furthermore, from the lender’s risk management perspective, that extra 50 basis points of yield acts as a quasi-principal payment during the first 10 years of the loan. My general belief is that “innovative loan products” are synonomous with “future charge-offs” where lending institutions are concerned. But, in this case, I don’t see a big problem if the underwriting is done carefully. And, as a consumer, I would consider taking on one of these loans under the right circumstances.
