Exotic Mortgages Are Turning The American Dream Into A Nightmare
Wednesday, September 20, 2006SUSIE GHARIB: Lawmakers on Capitol Hill today heard chilling stories about the housing market. The American dream of owning a home could soon turn into a nightmare. The real estate boom made so called exotic mortgages popular and now some homeowners with those interest-only and payment option loans could be at risk. Stephanie Dhue reports.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: As home prices fall and interest rates rise, lawmakers worry homeowners with exotic mortgages may be in trouble.
SEN. JIM BUNNING (R) KENTUCKY: Over the past two or three years have lenders used adequate underwriting standards or did they get so loose with their money that significant numbers of borrowers are going to default unless they can refinance or sell in the current climate?
DHUE: Regulators say it`s too early to tell. The popularity of payment-option adjustable rate mortgages and interest-only loans has ballooned in recent years, from less than 2 percent in 2000 to more than 30 percent last year. Whether that`s a problem may take time to determine, since many of these loans are in their early stages.
SCOTT ALBINSON, EXAMINATION MANAGER, OFFICE OF THRIFT SUPERVISION: As these loans begin to recast in the coming years, it will be partly dependent on where interest rates are, as well as macro-economic factors, employment statistics and real estate values, of course.
DHUE: Interest-only mortgages require that the homeowner initially pay only the interest on the loan. Payment-option ARMs let homeowners choose how much they pay on the loan each month, with one option being a minimum payment that covers only a portion of the monthly interest. In that case, unpaid interest is added to the principal, increasing the total loan amount. Typically, these loans have one to three years before the payments adjust.In some cases, the adjustments can double the monthly payment.
MICHAEL CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE LENDING: When you add a payment shock of 20 or 40 percent, you end up with loans where the mortgage burden is more than the borrowers take home pay.
DHUE: Mortgage brokers say exotic mortgages are a response to consumer demand.
GEORGE HANZIMANOLIS, PRESIDENT-ELECT, NATIONAL ASSOCIATION OF MORTGAGE BROKERS: The consumer, not the government and not the mortgage originator, is the best decision-maker.
DHUE: Last year, Federal regulators proposed guidelines to tighten lending standards and increase disclosure about the risk of exotic mortgages. Regulators said today those guidelines will be finalized in the coming weeks, but some lawmakers are afraid that will be too late. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
