Exotic loans causing many mortgage woes
By Melissa Wirkus
The housing “boom” of the past few years
is now causing a lot of problems for just about every
adult in America. During this time, many lenders promoted
“exotic” or non-traditional mortgage loans
that helped people get into bigger and more expensive
homes than ever before.
Many of these loans touted incredibly low introductory
interest rates and minimum payments of interest only.
But now, as many of these loans adjust, people are finding
their monthly payments increase by hundreds upon thousands
of dollars. This could mean very bad news for the mortgage
world and real
estate industry in general.
An August 30, 2006 article by Vanessa Richardson of
MSNBC.com, “‘Exotic’ mortgages seen
losing their allure,” tells the story of people
who are not able to make their mortgage payments because
of these alternative loans.
“Now these cheap mortgages that fueled the real-estate
boom are beginning to hurt the homeowners they once
helped. Higher interest rates and the end of honeymoon
periods for too-good-to-be-true teaser rates are increasingly
causing payment
shock for borrowers.”
“Many of these mortgages carry negative amortization
features that permit borrowers to pile on additional
debt beyond their original balance, and make minimal
payments for the first several years. Once the initial
period is over, however, payments could shoot up by
100 percent or more as the loan resets.”
So many people are finding that they cannot make their
new mortgage payment because it is so much higher than
the minimum payment they were making before.
“More California homeowners are having difficulty
making their mortgage
payments, according to a report by DataQuick Information
Systems. Banks and mortgage companies sent warning notices
to more than 20,000 homeowners earlier this year, telling
them they were in danger of foreclosure. That’s
an increase of 67 percent, the biggest one-year jump
on record. Though a notice of default doesn’t
mean a homeowner will lose their house, it could be
a key measure of financial distress.”
So, since so many people are liable to default on their
loans in the near future, mortgage professionals and
regulators are trying to take steps towards easing the
damage and pain that is likely to happen quite soon.
New regulations are going to be put in place that requires
lenders to be stricter on loan applications and approvals.
“Federal and state financial regulators are expected
to issue mildly restrictive guidelines for lenders making
new loans this fall, but these rules won't help homeowners
who are heading for payment resets in the coming year,
and may be unaware of the financial
shocks they face.”
Other companies are issuing letters to their borrowers
to alert them of the rate increases that are set to
happen within the year.
“To head off potential problems, Countrywide Loans,
the largest mortgage originator in the U.S., has started
sending out letters to thousands of its borrowers who
have been making only the minimum payments on the company's
pay-option ARMs. The letters are framed as “an
early message” to alert homeowners that based
on their current payment trends and potential future
interest rate changes, they should prepare themselves
for significant increases in monthly payments.”
Hopefully measures such as these will help to offset
the potential problems the mortgage industry could face
as a result of these loans.