'Exotics' Deemed a Factor in Housing Boom

"Exotic" mortgages -- in particular, payment-option ARMs and interest-only loans -- were a factor in the nation's housing boom of the past few years, a panel of economists told a Senate subcommittee on Wednesday.Richard A. Brown, chief economist of the Federal Deposit Insurance Corp., told the Senate Banking subcommittee on housing that in "hot housing markets" payment-option adjustable-rate mortgages and IO loans were used to help qualify homebuyers. Mr. Brown and other panelists said exotic loans and other factors -- including low interest rates, market demand, lack of developable land, and rising commodity prices -- fueled a home price boom that began in 2003. David Seiders, chief economist for the National Association of Home Builders, said the performance of option ARMs and IO loans is an "area of substantial uncertainty" for the market. He said "we know the dollar volume" of option ARMs originated, but "we don't know the features. Is it a payment-option ARM with a piggyback loan too?" Some economists believe that when option ARMs adjust at higher note rates, many consumers may default on the loans. Next week the subcommittee will hold a hearing on the role exotics play in the mortgage market.