Mortgage lenders have reaped huge profits in the last few years financing Americans' voracious demand for home loans.
But as concerns rise that the housing boom has become a dangerous bubble, mortgage companies are facing a growing chorus of critics who say that the industry has been irresponsible in its lending practices and that it has set the scene for a potential financial crisis.
Nationwide, mortgage debt has ballooned by about 70% since 1999 to nearly $8 trillion as lenders have relaxed credit standards. They have offered ever more appealing terms so that borrowers can get home loans even if they have little or no money for a down payment and can't document their income.
The new loans -- some with initial "teaser" interest rates as low as 1% -- have allowed millions of Americans to buy houses or take equity out of their homes.
But bank regulators, industry analysts and consumer advocates increasingly fear that a large number of recent borrowers won't be able to keep up with their payments when introductory rates end and monthly loan costs automatically shoot up.
By some estimates, a record $1 trillion in outstanding adjustable-rate mortgages could face payment increases in 2007, up from $83 billion this year.
"An adjustable-rate loan made to a family which can barely afford the initial monthly payments represents a ticking time bomb," said Stephen Brobeck, executive director of the Consumer Federation of America in Washington.
The criticism has placed lenders on the defensive. Many in the industry assert that warnings of a financial disaster stemming from the borrowing wave are overblown.
What's more, they say, the loans they've promoted in the last two years represent important strides in the history of finance, and it demeans consumers to suggest they shouldn't be offered new mortgage choices.
A report last month by the Mortgage Bankers Assn. declared that "the mortgage market is fundamentally working: Lenders are innovatively creating mortgage products that meet the needs of borrowers, while taking appropriate measures to manage risk."
But some industry veterans say they're worried. Herb Sandler, who pioneered alternative kinds of mortgages 25 years ago as a co-founder of Golden West Financial Corp. in Oakland, says the white-hot competition to write new loans has made mortgages too easy to get.
"All of us should be higher than we are," Sandler said of teaser loan rates. "What's going on certainly bothers us."
