Analysis: Some 2007 home loans were through the roof

WASHINGTON -- The share of Americans taking on huge new debt to buy a home was increasing even as foreclosures and plummeting housing prices began sending shock waves through the nation's economy, a USA TODAY analysis shows.

In 2007, the most recent year for which statistics are available, banks and other lenders gave out nearly 419,000 mortgages to buyers borrowing at least four times their annual income, sums that were unheard of less than a decade ago.

An examination of federal lending-disclosure reports show that amounts to 9% of all borrowers in 2007, a rate higher than at the peak of the U.S. housing boom.

The size of those loans should have been a clear red flag, says Susan Wachter, who studies real estate and finance at the University of Pennsylvania's Wharton School. People who borrow that much money are more likely to default on loans.

"It's the continuation of loans that were clearly designed to fail," she says. "In 2007, we were clearly about to go into a disaster, but ... the loans were still being written." On average, buyers in 2007 got mortgages that were double their income.

Lenders do not typically consider the size of a loan in respect to the applicant's total income. Instead, they focus on how much of the borrower's income will be consumed by monthly loan payments, a figure that can change depending on the terms of the loan. But that measure didn't capture the risk of expensive adjustable-rate loans, which left buyers facing steep increases in their monthly payments, says Margot Saunders of the National Consumer Law Center.

Writing that kind of huge adjustable loan "is like jumping off a bridge without knowing how high it is, and certainly without a parachute," Saunders says.

Mortgage Bankers Association Chief Economist Jay Brinkmann says there's nothing wrong with loans significantly bigger than borrowers' yearly incomes. When interest rates are low, they're still relatively affordable, and in parts of the country where home prices spiked, "that was what you had to pay to get into a house," he says.