Exotic loan products remain a popular borrowing option, despite the increased risks and warnings. Exotic mortgages are the non-traditional mortgages that allow borrowers to put down little to nothing and make low monthly payments. An interest-only or negative amortization mortgage is an example of an exotic mortgage. Exotic mortgages reached a high level of popularity in the past five years of housing boom. With interest rates on the rise, red-hot home prices and low borrowing costs are fading quickly. Interest-only and other flexible mortgages have shown that they are increasingly risky as the market stabilizes. Yet, exotic mortgages remain a popular option for homebuyers. Traditional, long-term fixed mortgages remain the loan choice for the majority of homebuyers, but increasing levels of borrowers are shopping for interest-only and pay-option ARMs. Exotic loans remain popular in high-cost housing markets, where taking out a non-traditional loan is the only available option for affording a home. Many of these mortgage programs worked well when there were double-digit home-price gains to build equity, but in areas where housing is cooling, equity is slowing down. Another problem, says Bill Callanan, a partners with Mortgage Management Systems, is that household incomes haven't been rising as fast as interest rates. "In our changing market, from unprecedented low rates to a steady rising of interest rates, these varieties of loan programs have become much more popular," he explains. "But if you're scraping nickels together, they're not for you." The added risk from exotic loan programs has led several regulators to issue warnings to lenders. Mortgage bankers say that the demand for alternative loans that offer reduced payments isn't as strong as one-year ago, partly due to warnings. But the market remains aggressive and mortgage lenders are now offering a massive array of loan options. Many of them result in negative amortization. "While the lending industry has characterized nontraditional borrowers as financially sophisticated and savvy consumers, the truth is that many are far from affluent and could be betting the house on their mortgage," said Allen Fishbein, director of credit and housing policy at the Consumer Federation of America. "Because homeownership is so critically important in financial security, these Americans are unwittingly putting their entire financial livelihood at risk." |
