Exotic Loans

That sound? It's the approaching thunder of a trillion and a half dollars of option arm loans about to reset. That's trillion with a T. A Mortgage Broker's Synopsis:

These Option Arm, Neg Am Pick a Pay Loan programs were one of the things keeping the home building bubble and mortgage lending bubbles going for the last 3 years. Without these products, the market (at least in California) would have collapsed 3 years ago. Instead the bubble just got bigger and bigger and we will see even a greater collapse when it comes. Ninety percent of those who take an interest only loan can only afford the interest only part and not only that, there entire lifestyles are planned around that payment.

These loans were seen as smart because if you're flipping the home you only plan on making payments for a few months so why not keep those payments as low as possible? Unfortunately two things happened, people started using these loans because the initial lower payment was all they could "afford", and the market collapsed and would-be-flippers were stuck with the homes. The lenders were only too happy to push these loans as the commissions were huge.

When you are talking about the high loan amounts in California, the money to be made by pushing someone into one of these programs is huge. So are the temptations. Some lenders went so far as to put on their rate sheets that the maximum a broker or mortgage loan officer can make is $50, 000.00 on a given loan.

These exotic loans are only one of many causes of the housing collapse in the US, but possibly the most important. They're something I've been quite interested in: Negative amortization, The credit bubble . I just hope we can keep these loans out of Canada. It's easy to put the responsibility on the borrower, but as the US has shown us people are generally dumb financially unsophisticated, and need to be protected from themselves and unscrupulous lenders (and stopped from taking the rest of us down with them).

On related note, here's one of the many amusing antecodes from the collapse:

Doug Milliken, the newly elected Arapahoe County treasurer who ran on a platform that promised to help families avoid foreclosure, is in the process of losing his house. Milliken’s campaign fliers promised to ‘educate homeowners on how to make wise decisions to avoid losing their homes’ and to ‘empower families to save their home when faced with foreclosure’. He said he didn’t expect he would be embroiled in the same problem he was telling voters he would help them avoid. ‘When I brought up this issue, this was the furthest thing from my mind,’ he said.