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."
Mortgages other than the conventional fixed-rate type accounted for an unprecedented 63% of the dollar volume of all loans made in the second half of 2004, according to the mortgage bankers association.
"Mortgage bankers are volume junkies," said Richard Eckert, who tracks home finance companies for investment firm Roth Capital Partners in Los Angeles. "All of these loans are designed to keep the party going."
New kinds of adjustable-rate loans have appeared in tandem with a general easing of credit standards at many mortgage companies, amid a heated battle for market share.
An annual survey of major banks by the Office of the Comptroller of the Currency, the primary regulator of national banks, found that in the 12 months ended in March, more than 4 lenders loosened home loan credit standards for every 1 that tightened them.
That occurred even as the Federal Reserve was raising short-term interest rates, which normally is a signal for banks to be more cautious.
Chris Canfora, a mortgage broker with two decades of experience in Nevada and California, said she left the field in 2002 to travel. When she returned to the business in 2004 in Orange County, she said, "I thought the whole world had gone crazy."
Lenders had sharply lowered credit standards to keep loan production humming and fee income up, she contends. Up and down the real estate food chain -- from builders to real estate agents to appraisers to independent mortgage brokers to major banks -- "everybody's getting pressure from someone else" to close deals, Canfora said.
Rocketing home prices have made it impossible for many would-be home buyers to qualify for 30-year fixed-rate loans or even many standard adjustable-rate mortgages, or ARMs. High prices also have made it impossible for many buyers to meet the old standard requirement of a 20% down payment.
Lenders' answer has been the "option ARM," a type of adjustable-rate loan that was rare before 2004. These are the loans behind the unsolicited offers of low-money-down, 1% interest rate mortgages that stuff consumers' mailboxes every day.
They're called option ARMs because borrowers -- home buyers or homeowners seeking to refinance -- can choose among several monthly payment options, including making a minimum payment based on an initial interest rate as low as 1%.
For a $200,000 mortgage, a 1% starting rate would mean a monthly principal-and-interest payment of $643. By contrast, a 30-year loan that size at a fixed rate of 6% would require a payment of $1,199.