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First the Subprime Mortgage Crisis; Now the “Exotic” Mortgage Crisis?

Posted on | December 15, 2008 | 8 Comments

On December 14th, 2008, 60 Minutes reported the story “A Second Mortgage Disaster On The Horizon.“  The premise of the report was that the first mortgage crisis was due to defaults on subprime mortgage loans.  We all know what has happened to the housing market and the economy since the subprime crisis began.  What most Americans do not realize is that another mortgage crisis is also brewing: the unconventional mortgage crisis, also known as the “exotic” mortgage crisis.  The “exotic” mortgage crisis may be even more devastating than the subprime disaster.

Subprime mortgage loans were just one of the “fancy” loan types that gained popularity during the housing boom of the mid 2000s.  Other unconventional loan types include Alt-A and Option ARMs.  Option ARMS lend money to borrowers at an extremely low rate at the beginning of their term; sometimes as low as 1%.  After the initial period, usually one to three years, the rate increases greatly.  A monthly mortgage could go from $700 a month to over $1500 a month when the Option ARM “resets” to a new rate that benefits the lender rather than the borrow.  Many of these Option ARMs are “resetting” themselves today causing homeowners to default because not only are their payments higher, they have less money due to the struggling economy.

Alt-A loans require very little documentation of proof of income.  Obviously this is a very risky endeavor for any financial institute, but the institutions were doing anything to get borrowers in their door during the housing boom because they made money in fees.  Sadly, many did not realize that these borrowers could very well struggle to create income to pay their monthly mortgages.  Individuals could only hide their true financial status so long and now it is starting to catch up to them.

Overall there is $1 tillion in subprime mortgages loans and Alt-A mortgage loans are rapidly approaching $1 trillion.  On top of that, Option ARM mortgage loans account for over $500 billion.  Several housing market pundits feel that well over 50% of the “exotic” mortgages will fail in the coming years.  If this is the case, it truly looks like a second mortgage disaster is well on the way.

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8 Responses to “First the Subprime Mortgage Crisis; Now the “Exotic” Mortgage Crisis?”

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