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I’ve been writing and reading a lot about exotic mortgages – interest-only or negative-amortization loans, where borrowers pay no principal and often just part of the interest for the initial period of the loan.

These loans have been the focus of a bunch of attention lately. They’re attractive to borrowers because of the low payments (or the option to make a low payment once in a while), and the way they allow many people to “stretch” into a house they couldn’t otherwise afford, while they wait (or hope) expectantly for a raise at work or some other financial blessing.

What might cause a problem is when the loans reset – when the borrowers have to start paying interest AND principal, at variable interest rates. In a recent story, we reported the latest data from FirstAmerican LoanPerformance about how many of these mortgages had been taken out in San Diego.

In the first five months of this year, 67.8 percent of the purchased and refinanced mortgages in San Diego were either interest-only or negative-amortization loans.

Last year, 68.8 percent of local mortgages were exotic loans. In 2004, these types of loans made up 57.7 percent of the pie. Only a quarter of mortgages were interest-only or negative-amortization in 2003, and only 11 percent were exotic in 2002.

But when I talked Friday with LoanPerformance vice president Bob Visini, he mentioned an important fact – ARMs (the category the exotic loans fit into) are not a majority of the active loans in San Diego right now.

“It’s not all bad news,” he said. Because these loans have only been popular for a few years (only 1 percent of loans in San Diego in 2002 and 2003 were negatively amortized), the majority of mortgages being paid by all San Diego homeowners are the traditional, fixed-rate loans.

Visini sent me LoanPerformance’s estimate today for the San Diego active portfolio of loans as of June 2006. He said 69 percent are fixed, while 31 percent are adjustable-rate.

So, Visini points out, while he and his colleagues are still concerned about the chunk of people who will be facing resets in the near future, they don’t expect the entire home-loan economy to tank.

That places the exotic mortgage phenomenon as a piece of a larger pie, if you will. Exotic pie – sounds like a sweet treat. Anybody have a recipe?

On a related note, if you click over to the Calculated Risk blog and scroll down to that blogger’s post called “ABC: Odd Todd on Real Estate” you’ll find a great explainer, cartoon-style, on these loans from an ABC broadcast in June 2005.


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