(updated)
From Marketwatch:
Exotic mortgages sow confusion, senators told
Homeowners don’t fully understand the risks associated with taking on alternative mortgages that allow interest-only payments or negative amortization, federal officials told senators Wednesday.
At a hearing on so-called exotic mortgages before the Senate Banking Committee, U.S. banking regulators promised that long-waited guidance on “exotic” mortgages to lenders would be released in final form in a few weeks.
he Federal Deposit Insurance Corp. found that exotic loans were more prevalent in the housing markets with the biggest price increases, and suggested that the loans were both a cause of and a reaction to the housing boom.
“The greater availability of flexible mortgage structures probably allowed price increases to outstrip growth in incomes to a greater extent than would otherwise have been the case,” said Sandra Thompson, acting director of supervision and consumer protection at the FDIC. But the popularity of the loans is also a response to the higher prices, she said.
The regulators testified that defaults and foreclosures on nontraditional loans remain very low, but they emphasized that it’s too soon to tell what might happen if the economy slows, interest rates rise and housing prices stagnate.
From the Associated Press:
GAO: Better info on mortgage risks
Federal regulators need to do a better job of explaining to people the workings and potential risks of interest-only and other nontraditional mortgages, congressional investigators said Wednesday.
Nontraditional home loans that once were mostly the domain of the wealthy, especially interest-only mortgages and option adjustable-rate mortgages, have exploded in popularity in recent years as people stretched to buy high-priced homes during the housing boom.
“Although lenders and certain brokers are required to provide borrowers with written disclosures at loan application and closing, federal standards on these disclosures do not currently require specific information on (alternative mortgage products) that could better help borrowers understand key terms and risks,” the Congress’ Government Accountability Office said in a report released Wednesday.
…
The GAO said that from 2003 to 2005, nontraditional mortgages comprising mostly interest-only and payment-option ARMs grew from less than 10 percent of all residential mortgage originations to about 30 percent. They were highly concentrated on the East and West coasts, especially California, the GAO said.
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However, it is too soon to tell to what extent payment shocks might spur an increase in late payments on home mortgages or an increase in foreclosures, the GAO said.
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