Will Exotic Home Loans Go Out of Vogue?

By Jonathan Haeber
CMR Columnist

New regulatory moves by the Federal Reserve have significantly reigned in the seemingly unregulated climate that loan underwriters had during the housing boom. Now, lenders will have to explicitly warn borrowers of the inherent risk in these loans, including letting borrowers know how high their rates could go in a worst-case scenario.

Interest Only Loans & Option ARMs Oh My!

The ARM loans, including the popular interest only mortgage have been drawing in lower-income buyers in the recent real estate boom. Now that the boom is over, many borrowers are defaulting on their loans and lenders are tightening the requirements for their own benefit.

For mortgage lenders who aren't reigning in their requirements, the federal government is now adding push to shove. The even more treacherous pay-option ARMs (in which the buyer doesn't even need to make the minimum payment to cover interest) are being significantly regulated. The market-share of these loans has skyrocketed in recent years. In July they topped off at 20 percent of all loans. The most risky loans of all, option ARMs, made up a staggering 12% of the market.

Mortgage Foreclosure Climbs

As a result of these loans, foreclosure activity is climbing. Residential mortgage foreclosure in California climbed to its highest level in four years for the 3rd quarter of 2006. The good news is that there will be less foreclosure as a result of the new regulations. With less foreclosure, there will be a more stable real estate market, and your home equity could increase in the near future. Finding a new home loan may not be such a bad idea, after all.

Even though the housing market is in a slump, it's considered to be a healthy correction in the market. With less risky loans comes less risk in the market, and home values should soon be headed on their way back up.

Source
New York Times: New Rules for Exotic Loans

About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.

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