There is both a benefit and a danger in the low payment interest-only and "negative amortization" loans.
They've always existed for "niche" markets but really aren't for everybody as some lenders and brokers are pushing them.
John and Jane Public that make $60,000 a year with two kids, looking for a decent $150,000 home in the suburbs to raise their kids in should not do this loan. Either a fixed rate, or longer period ARM (like a 5 or 7 year) would be best.
The 6-month variable interest only loan (and similar types like the "Pay Option" ARMS) is really best for either the professional investor who can make more money in the market than by paying down principal, or for the person who knows that they will sell the property within a short period of time and will not build much equity anyway. However, these are still risky with less than a 5 or ten percent down payment especially in areas where real estate is overpriced and more likely to crash (coastal blue states.)
ARMs are also good in the subprime market to allow someone to improve their credit to refinance to a better fixed rate later-BUT-that doesn't work when people don't improve their credit...and as they say, old habits die hard.
Bottom line. The creative loans have a purpose. But, as a mortgage loan officer myself, I don't offer them to someone unless they request it (and seem to really know what it is already) or it really would work well for them.
Good point. With the new bankruptcy laws, I would guess the Fed is way ahead of the curve on this one. People who used to be able to get out of those mortgages may find themselves unable to do so.
Does anyone out there know what the new bk legislation says about mortgage defaults?
Yeah, good luck selling that concept amid the stiff winds of home builder/morgtage company/Larry Kudlow propaganda. Once the wife gets a look at that 4,000-square-foot place and imagines it full of Thomasville furniture with the kids playing in the backyard, that no-interest loan is as good as signed. ;)
Dieters are often advised that they have to "redefine their relationship with food". I think Americans similarly need to "redefine their relationship with home ownership" - there are market conditions and personal circumstances under which it is just extraordinarily unwise. "The American Dream" and similar folk wisdom about home ownership derives from the Depression era, and was invented to fit a set of economic circumstances which just aren't applicable today. People are taking immense financial risks to do what they think is the safe thing - standing the concept of personal responsibility on its head.