The popularity of "exotic mortgages" has the media in a feeding frenzy that the lenders are creating the much bemoaned real estate bubble.
If there is a bubble, it has less to do with financing than with stories of fast riches in hot real estate markets. Yes, the easy money loans have helped some borrowers buy beyond their means. And yes, the exotic loans can act as timebombs when rates spike higher. But the loans are no more the cause of a speculative real estate bubble than a better golf club helps Tiger break par. They are simply tools.
I beleive the exotic loans are good tools for borrowers who know how to use them. Interest only payments allow a borrower to pay a smaller payment when cash flow is low, and pay down principal in better times. These loans actually reduce the risk of loan default, because default only happens when a borrower can't make their monthly payment.
Therefore any loan that allow this kind of payment flexibility should be seen as a positive for loan quality and stability, not riskier?
Along this same line of reason, an Option ARM - or the extra hybrid, negative amortizing, low payment loan is even more secure. Option ARMs allow a borrower to pay even less than the interest accrual on the loan, with the difference being added to the princiapl. Paying these uber-low rates is even easier on the borrowers monthly cash flow, so the default risk is further reduced. If interest rates spike, the payment does not change, a minimum payment is locked in for several years.
The experts and the media are having a field day with these loans, and few industry insiders have been defending the popularity of the products.
The consumer clearly understands the value to interest only and exotic payment mortgages, this is why they have become the most popular loan options. But few consumers are being interviewed to defend why they choose these loans. Why the media witch hunt?
Simple, the headlines of a real estate bubble is much more exciting than writing about how new innovations in lending are helping Americans afford the Dream better.
Bob Waun , Founder & CEO
bwaun@vacation-finance.com
As a VP at Paramount Bank, and while at Wells Fargo, Bob innovated lending for Condo Hotel projects. He holds a Master's degree in finance/economics and BBA in finance from Walsh College and a MI Real Estate Broker's License. He has personally lent over $750+ million in residential loans, and over seen operations lending $1+billion. He has been a professional guest speaker and taught numerous courses/seminars on real estate finance.
He managed controlled business relationships for a national real estate brokerage in MI and OH, held top sales honors for Wells Fargo in 7 states. Bob has a 17 year track record of cutting-edge innovation in the mortgage finance.
