Creative and exotic mortgage programs are scaring the H____ out of the feds, Wall Street and consumers alike. Are the lenders themselves liable for the fallout?
Interest-only mortgages, Interest-only adjustable rate loans, Short term one-month and six month ARMS, Optional payment ARMs and negative amortizing mortgages... the list is long and nearly every one of these mortgage programs has a higher risk aspect to them that may prove to be greater than the benefits that are taunted and sold by the lenders.
The federal regulators, Wall Street securities firms and mortgage bankers and brokers know this risk well. Each governing entity has issued guidance concerns to address the risks posed by these residential mortgage products. There are growing concerns with mortgages that allow the borrower to delay, defer and in some programs, allow the borrower to make payments that don't even pay the amount of interest due in any given month. read on...
More often than not, the primary similarity in each of these programs is that the terms allow the borrower to make a lower monthly payment at the onset of the mortgage that is much lower than a typical 30 year fixed-rate mortgage. The lower payments are for a specified period of time, typically 1 to 5 years. The benefits of the lower payments are in exchange for assuming future risks of rate adjustments and much greater payments in the last 20 or 25 of the term.
Many of these programs have been available to the consumer for a few years now. What has changed so dramatically is the number of lenders offering these more risky loans and the number of consumers being sold. It is estimated that over 500% more consumers are electing these programs over the more stable and secure 30 year fixed rate mortgage and unfortunately, more often than not, it is because that consumer is applying for and obtaining more mortgage than they really can afford. Where these were originally intended for a very few number of borrowers; the more financially sophisticated, savvy and high-income borrowers, they have become a mainstay in most markets... and that is where the fear is coming from. Most borrowers are in no position to prepare for the risks inherent with the loans they are buying into. Unfortunately, these are the borrowers that can least afford to take on the risks.
The concerns and fears lie in a couple of arenas: Many real estate markets in the country are projected to be in a period of flat to declining values... after having a few years of unusually high appreciation. The gamble for the borrowers was that we would see continued high appreciation and this would offset any of the potential risks that come with these exotic mortgages. Well unfortunately, that is not the case in virtually every real estate market in the country and the rising delinquencies and foreclosures are a reflection of that very fact.
Secondly, borrowers are typically optimistic and believe their incomes will always go up. They make the decision to get one of these mortgages under the assumption and hope for greater income in the future. For most though, the typical raise over a period of time is 1 to 3% annually (if that) and yet, when the payment adjustments occur in these exotic mortgages, they can be as much as 50% increases in payment amounts!
Add to that, the growing number of second mortgages and home equity loans borrowers are getting to pay off all their consumer debts, and you take away the equity that might have offset the affects of the factors above. The risks in these loans just became even greater!
So, the question I raise is this... is the mortgage industry at least partially to blame for the coming real estate bust (that is already occurring in some markets as we speak!)? Armed with special loan programs disguised as creative loan alternatives to "help" the consumer and the housing industry... a case could be made that the lenders are just as much at fault and liable for the risks and loss of equity and loss of homes that will be the resulting fallout from these programs.
And another question? Do these programs have built in, at the advantage of the lending community, a forced refinancing aspect to them? By originating these exotic and risky loans, is the lender really just building into their portfolio of loans a future refinance business? When a borrower is forced to have to refinance their mortgage before that huge payment adjustment comes due, is that fair business practice?
The mortgage business and its predatory pursuit of more and more business and higher and higher profits has blinded them to their responsibilities and in so, are the lenders actually liable for some of the fall-out/ Will we see class-action suits from consumer groups that have been harmed by these risky loans? Time will tell!
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