Colorado ranks second only to the District of Columbia when it comes to risky interest-only mortgages and has high rates of foreclosures and personal bankruptcies, according to a report Tuesday by the Federal Deposit Insurance Corp.
Of mortgages signed in the state this year through July, 39.7 percent were interest-only or related products, compared with 23.7 percent nationwide.
A year ago, by one estimate, Colorado ranked fourth for such loans.
The new FDIC report relied on data from LoanPerformance, an economic- analysis company owned by California title-insurance giant First American Corp.
Interest-only loans enable borrowers to get more home for their payment because they forgo principal payments.
The loans typically start out at lower interest rates that adjust after a period of three, five or 10 years.
But payments can rise sharply when the loans convert to more-traditional mortgages.
Jay Wilson, state manager for National City Mortgage, said he is concerned that some lenders use the loans as marketing tools rather than financial tools.
“Instead of being one of a number of options, they sell the sizzle of the start rate rather than the details of the mortgage,” Wilson said.
Borrowers in the state appear to be stretching to buy homes, despite the fact that Colorado ranked 43rd in the country in home appreciation in the second quarter, said Alan Bush, a regional manager with the FDIC in Dallas. The median price of a home in metro Denver is about $250,000.
“Home prices in Colorado are still expensive,” Bush said. “You have a lot of people getting back on their feet and wanting to get into their homes.”
Real-estate investors in Colorado are also using the riskier loans to buy rental properties, said Tucker Hart Adams, a regional economist with U.S. Bank.
She cited the disparity of construction permits to population growth and migration to the state.
The use of the riskier loans could exacerbate already-high bankruptcy and foreclosure rates, she warned.
Colorado bankruptcies, measured over a four-quarter moving average, are running at the highest levels in the past 25 years and are significantly above the U.S. average, according to the FDIC.
Colorado had 7.9 bankruptcies for every 1,000 people in the state, ranking it 13th in the country.
The U.S. rate is 6.19 per 1,000 people.
Colorado had 6,528 foreclosure properties available for sale on Foreclosure.com in August, compared with 796 in California.
Colorado foreclosures, while not at their late-1980s record levels, have doubled in the past four years.
Wobbly consumer finances have yet to show up in the financials of Colorado banks and thrifts, according to the FDIC.
“Thus far, Colorado insured institutions, as measured by favorable performance and strong loan portfolios, are proving adept at managing the risk,” the FDIC said.
That’s a big change from the beating Colorado banks took in the 1980s.
Banks’ median return on assets, a measure of health, is running at 1.17 percent, slightly better than the rate of recent quarters and ahead of the national median return of 1.06 percent on assets.
Loans on which borrowers had stopped making payments have fallen from 1.46 percent of all loans in the second quarter of 2004 to 0.99 percent in the second quarter of 2005.
Staff writer Margaret Jackson contributed to this story.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
