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Exotic, Non-Traditional, or Risky

posted by Katie Porter

The Mortgage Bankers Association recently released its semi-annual survey on home loan originations. The press release reports that interest-only loans and payment-option loans continue to grow. In the first half of this year, 26% of all mortgage loan originations (based on dollar volume) were interest-only loans. Another 15% of dollar volume were "payment-option" adjustable-rate loans.

The Mortgage Bankers Association press release refers to these loans as "so-called 'non-traditional' products. Others have labeled them "exotic" mortgages. It strikes me that these labels minimize the extent to which these loans dominate today's home lending economy. Interest-only and payment-option loans are too common to be marginalized as "exotic," and given the increasing frequency of these loans in recent years, American homebuyers have arguably already created new traditions. Perhaps we should label them what they are--risky. Terminology matters to consumer perception. Consider the trend toward renaming no-documentation mortgages. Originally called "NINA loans" (nice, friendly-sounding acronym for no-income/no-asset), they are now often mocked as "liar's loans" (making clear the potential for deception).

Federal regulators recently released a report about interest-only and payment-option mortgages, querying consumers "Are they for you?" The brochure offers three examples of consumers who may benefit from an interest-only or payment-option home loan: people who are certain their income will increase (about to graduate from law school, perhaps?); people who have substantial equity in their house and will invest elsewhere the money that they would put toward principal payments; and people who have irregular income (such as commissions) and want flexibility in making their payments. Frankly, I'm not sure about the wisdom of these risky home loans even if you fall into these categories. I do know that the population falling into these categories is not nearly big enough to account for the 2006 originations.

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