Lenders flock to D.C. mortgage market

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Mortgage lenders are increasingly finding their way to the Washington area to cash in on one of the nation's hottest real estate markets.

Consumer advocates say the growing number of mortgage lenders and the vigorous market are leading to risky loans.

Between 2000 and 2003, the value of mortgage loans jumped from $26.4 billion to $130 billion in the Washington area, a nearly five-fold increase, according to the Mortgage Bankers Association.

Although more recent figures are unavailable, some mortgage bankers estimate the number of lenders operating in the Washington area has increased about 25 percent.

"You have a wide range of originators of mortgage loans in this area," said Alexander Boyle, vice chairman of Chevy Chase Bank. "It's a rapidly growing area, so I think all those segments of the market are growing."

Home mortgages made up most of the loans.

"Home equity lending has exploded in the D.C. region as borrowers are utilizing their primary residences as a source of funding for down payments on secondary and investment properties," said Malcolm Hollensteiner, vice president of National City Mortgage Co.

The mortgage market is being fueled by a strong job market and relatively low interest rates averaging 5.7 percent this week on 30-year, fixed-rate loans, which also is driving up the number of home buyers and the prices they are willing to pay.

In Northern Virginia, for example, the median home sales price was $489,900 in May, up 25.9 percent from the May 2004 median price of $389,000.

The competitive mortgage market is raising concerns that lenders are cutting corners to beat the competition, potentially leading to home foreclosures and huge debts for consumers.

"As housing prices in this area have continued to escalate, it's made it increasingly difficult for households to afford a loan, so they are taking out mortgages that are potentially riskier mortgages," said Allen Fishbein, housing and credit policy director for the Consumer Federation of America, a consumer protection group. "They may have no other option to qualify for a loan."

A nontraditional loan often cited by consumer advocates as high risk involves interest-only loans, which allow buyers to pay only the interest on their debt for the first three to five years before they must pay on the principal at an adjustable rate that can drive up monthly payments.

Other nontraditional loans offer interest rates as low as 4.25 percent initially at a fixed rate but later convert to adjustable rate mortgages that can add hundreds of dollars to monthly payments if interest rates rise only 2 percent.

"These are riskier mortgages than the traditional fixed-rate mortgages," Mr. Fishbein said. "It seems that a lot of people are turning to these out of desperation rather than out of choice."

About one-third of new mortgages in the Washington area in the past 18 months involve interest-only loans, according to the National Association of Realtors.