After being on Active Rain for almost 3 weeks now, this has been a big topic of discussion and growing concern. We have talked about the “Pay Option Arm” and the “Interest Only” loans that seem to be the most at risk for today’s consumers. Both of these products have shot up with home prices. And critics say not all buyers know what they are getting into.
Federal financial regulatory agencies are concerned that buyers who use these so-called exotic loans could be at risk. Especially the subprime borrowers and others who may not qualify for more traditional mortgage loans or who may not fully understand the risks of nontradional mortgages.
Because prices have accelerated, these loans have been the only means by which many people could afford to buy homes. This was a quote from an article in USA Today. “In 2005, 30 percent of all mortgages were nontraditional, compared with 2 percent in 2000, when median home prices began their rapid decline.”
In a blog that Brian Brady wrote last evening, Stop the Insanity in the Mortgage Marketplace, he talked about the individuals that sold these loans and seemed to have no care in the world. Better yet, not understanding what could very well happen in the near future. With that said, in August, the national foreclosure rates were 53 percent higher than they were in August of 2005.
What is sad is that several lending officials viewed the issues associated with nontraditional mortgages much differently from the regualtors and cosumer advocates. These individuals reacted strongly to the adoption of certain guidelines. Their arguement is that the individual institutions should have the ability and flexiblilty to underwrite loans and manage the risk differently than their competitors. As long as their actions are safe and sound, they should be able to continue these types of programs. Regina Lowrie who is chairperson of the Mortgage Bankers Association said,"Forcing all lenders to underwrite loans in the same manner discourages innovation and limits choices for consumers." This is coming from someone within the mortgage industry.
Here is a small list of the new approved guidelines that went into effect on Septemeber 29th. (for these pay option arms & interest only loans)
Ensure all loan terms & underwriting standards are consistent. And keeping in mind the borrower's capacity of paying back the loan.
Recognizing that these so-called loans have risk-layering features which have been untested in a stressed enviroment.
Make sure that the consumer has sufficient information understanding the loan terms and making clear their payment options and how they work.
Here are a few articles that give examples of what has happened to a few consumers. It also talks about the future and the risks of these nontraditional loans.
'Exotic' mortgages seen losing their allure - Real Estate - MSNBC.com
Homeowners place faith in 'exotic' mortgages - America's Housing ...
Posted by 
;)
;)
Jeff—I was preparing a post on the same topic and decided I was not knowledgeable enough about it, so I shelved the post. Foreclosures are significantly higher this year here in the Twin Cities, and reaching record numbers, particularly in poorer neighborhoods. This is from an article published in the “City Pages” newspaper, May 31, 2006: “… the fastest-growing sector of the mortgage industry has been the so-called subprime lenders, nontraditional lenders willing to extend credit—albeit on horrible terms—to consumers with bad track records. Because these lenders have been willing to loan homeowners more than the equity they have in their homes, or to overvalue their houses, borrowers in this category have been able to borrow far more than they can realistically pay. And because the fees associated with these loans are so high, borrowers often end up owing more than their home is worth…It's this last category of borrowers that credit counselors and consumer advocates suspect are behind the increase in foreclosure rates …”
I think it dovetails nicely with your post—Jay Merton