By Jodi Summers

As the housing market boomed, so has availability of so-called “exotic” or “nontraditional” mortgage loan products. New research suggests that middle and moderate-income borrowers with less-than-stellar credit scores are carrying the brunt of these riskier loans. Most of the non-traditional mortgages have been written in strong real estate markets — like Southern California — where continued home price appreciation is anticipated. Nontraditional mortgage products typically offer initial lower monthly payments than traditional fixed-rate loans to ensure that the initial monthly payments are affordable. Of course these borrowers are aware of the fact that most of these products have payment structures which reset the loan terms rest, usually two to five years down the line. Researchers fear that this new and enlarged payment could adversely affect some homeowners, making their homes potentially unaffordable.

The National Association of Realtors “is very concerned that some borrowers are using nontraditional mortgages without fully understanding the risks involved,” noted NAR President Thomas M. Stevens.

Many money managers, as well as the Consumer Federation of America, are concerned that some the new mortgage products is not appropriate for many borrowers who receive them, and that over the long term these mortgages could threaten homeownership. The CFA’s recent study, “Exotic or Toxic? An Examination of the Nontraditional Mortgage Market for Consumers” found that African American and Latinos were more likely to receive payment-option mortgages than whites, and African Americans were more likely to receive interest-only mortgages.

The report, which analyzed certain borrower and loan characteristics of more than 100,000 mortgages originated between January and October 2005, examines the implications of the rapid rise of nontraditional mortgages and how these products pose additional risks for borrowers.

“(The year) 2005 was the year that lenders attempted to deliver a lot of products that meet the financial needs and goals of their customers,” observed Doug Perry, senior vice president of Countrywide Home Loans.

The report confirmed that there is little understanding by many borrowers about how to compare or understand the differences between these loan products.

“While the lending industry has characterized nontraditional borrowers as financially sophisticated and savvy consumers, the truth is that many are far from affluent and could be betting the house on their mortgage,” stated Allen Fishbein, director of credit and housing policy at the CFA.

AMONG THE STUDY’S KEY FINDINGS

n More than one third (36.9 percent) of interest-only loan borrowers earned below $70,000 annually, and about one in six (15.6 percent) earned under $48,000 annually. More than one-third (35 percent) of payment-option borrowers earned under $70,000 annually and about one in eight (12.1 percent) earned between under $48,000.

n Latinos are nearly twice as likely as non-Latinos to receive payment-option mortgages. One in 50 (2.1 percent) non-Latino borrowers received payment-option mortgages compared to the 4 percent of Latinos that received payment-option mortgages. African Americans were 30.4 percent more likely than non-African Americans to receive payment-option mortgages. About 2.2 percent of non-African Americans received payment-option mortgages compared to 2.9 percent of African Americans.

n Nearly one in 10 (9 percent) African Americans received interest-only mortgages, 11.7 percent higher than the 8.1 percent of non-African Americans that received interest-only mortgages.

n More than half (53.8 percent) of payment-option borrowers and nearly two-fifths (38 percent) of interest only borrowers have credit scores below 700. More than one-fifth (21.4 percent) and about one in eight (12.1 percent) interest only borrowers had credit scores below 660.

“These products provide an important option for homeowners who have used them to tap their home’s increased equity for home improvements, to pay down debt and meet education and health care needs,” defended Regina Lowrie, chairman of the Mortgage Bankers Association. “Despite the concerns expressed by some regarding the increased use of ‘nontraditional products,’ delinquency and foreclosure rates remain well within the range of historical norms.”

“Nontraditional mortgages are more complex than your parents’ home loan, and some highly leveraged or unsophisticated consumers could end up learning that the mortgage that helped them buy their home was a ticking time bomb that destroyed their finances for years,” concluded Patrick Woodall, CFA’s senior researcher.

Jodi Summers is Director of the Investment Division at Boardwalk Realty. For your real estate needs, e-mail Jodi Summers at jodis@boardwalkrealty.com, or call (310) 309-4219. Visit her Web sites at www.SoCalInvestmentRealEstate.com or www.santamonicalandmarks.com.