Exotic loans causing many mortgage woes
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.