Exotic Florida Home Loans Have Far-Reaching Consequences for All
Some lenders seem to think that exotic, or non-traditional, Florida home loans have almost no negative consequences. And they have facts to back that view up.
But others not only believe these types of mortgages are harmful for consumers, they postulate they can have far-reaching, negative consequences that affect banks and investors, too. An article in Business Week makes just such a point.
The effects of non-traditional Florida home mortgages
According to the article, Nightmare Mortgages, Wall Street - and especially hedge funds - have also bought these loans and the risks associated with them. To paraphrase it a bit:
“The [option adjustable rate Florida home mortgage] might be the riskiest and most complicated home loan product ever created. (It) brought a whole new group of buyers into the housing market, extending the boom longer than it could have otherwise lasted.”
However, the article continues, there was more going on behind the scenes. Brokers were paid more to sell option ARMs than other mortgages, while lenders were allowed to claim the full monthly payment as revenue, even if the borrower paid the minimum and the loan’s interest rates and fees might have been set by hedge funds rather than the banks.
The article claims that banks don’t have to report on the number of these option Florida home loans they have written but they represented “at least 12.3 percent (of all mortgages written) during the first five months of this year.” Interesting information.
Option Florida mortgages worsening housing market?
Not only did these exotic loan products prolong the boom, they may well worsen the bust. The article states:
“They also betray such a lack of due diligence on the part of lenders and borrowers that it raises questions of what other problems may be lurking. And most of the pain will be borne by ordinary people, not the lenders, brokers, or financiers who created the problem.”
However, while the author of Nightmare Mortgages feels that “ordinary people” will bear the pain, it’s not prudent to overlook the fallout that may affect investors and banks. If lenders are actually booking non-existent payments and then are hit with massive defaults with no hope of recovery,there could be devastating damage in the future.
Hopefully, this isn’t the case - but the option national and Florida mortgage loan is not necessarily a product whose time has come and gone. Despite the housing slump, these mortgages totalled $77.1 billion in the second quarter this year.
