As Interest-only Home Loans Come Due, Some Borrowers See Just One Option: Walk Away

Of course they seemed risky, but like so many "creative financing" options during the housing boom that went bust in 2007, the idea of an "interest only" mortgage made sense — so long as housing values climbed. Now, according to a report in The New York Times, many interest-only mortgages will soon become unaffordable as homeowners have to actually start paying the principal — which could drive up monthly payments by as much as 75%. Such borrowers can't afford to sell, because they owe far more than the value of their home. One San Diego borrower told The Times: "I’m praying for another boom. Otherwise, we’ll have to walk.”

Still, this is hardly the first time that interest-only mortgages have been recognized as a disaster waiting to happen. In a September 2005 Knowledge at Wharton article titled, "Could Risky Mortgage Lending Practices Prick the Housing Bubble?" Wharton real estate professor Susan M. Wachter warned that interest-only and other types of subprime loans were contributing to soaring housing prices and setting the stage for a potentially rough pullback that could make the next recession far more severe than it otherwise would be. "Undoubtedly,” she said, “these new instruments bring us into uncharted territory.

That territory came to be known as the subprime crisis.