Pre-crisis loans entering principal repayment period may cause problems

Amortization schedules help ensure loans are repaid in a timely manner by allocating portions of each payment to interest and principal.

A recent article from MarketWatch looked at a looming problem in the U.S. financial system. A large number of borrowers who took out jumbo loans to purchase high value homes at the height of the early 2000s housing boom were put on payment plans that enabled them to cover only the interest due during the first few years.

According to the source, the most popular choice deferred principal repayment for 10 years, which means that loans issued at the market's peak, from 2004 to 2007, are starting to enter the principal repayment period. Adding to the problem is the fact that home prices were rising quickly during this period and credit standards were relatively loose, so many borrowers accepted high-balance loans to get the properties they wanted.

It may be challenging for those affected to refinance their mortgages, as lenders have tightened credit standards significantly since the boom ended. Rising interest rates may further complicate matters for those borrowers whose mortgages become adjustable after the 10-year mark.

As this blog discussed in a previous article, banks have been heightening their focus on risk management across the board, giving risk officers more say in business decisions and avoiding new products that recreate the risks seen during the last boom. Lenders can ensure that new mortgages are viable by using amortization software to create workable schedules that account for timely payment of interest and principal.

This is especially important given the evidence that consumer finances remain tight. Average household debt continues to increase, with student and auto loans driving up the total amount owed by many families.

With a professional-grade amortization calculator, lenders can examine how changes to different aspects of the payment schedule would affect the overall performance of the loan.