Today’s non-traditional mortgage products – interest-only, payment option ARMs, no doc and low-doc, and piggyback mortgages, to name the most prominent examples – are a different species of product, with novel and potentially risky features.
...This dominance is increasingly reflected in the numbers. By some estimates, interest-only products constituted approximately 50 percent of all mortgage originations last year. In the first half of 2005, IOs started to decline in favor of payment-option ARMs, which, according to one source, comprised half of new mortgage originations. And roughly every other mortgage these days is also a “piggyback” or reduced documentation mortgage, which points to another development that concerns us: the trend toward "layering" of multiple risks. There is no doubt that when several risky features are combined in a single loan, the total risk is greater than the sum of the parts.
We can readily understand why these new products have become fixtures in the marketplace in such a short time. One reason is that they have helped sustain loan volume that would otherwise almost certainly be falling, because rising interest rates have brought an end to the refinance boom. More important, lenders have scrambled to find ways to make expensive houses more affordable – although there’s now a concern that the very availability of this new type of financing has done its share to help drive up house prices, which in turn stimulates demand for even more non-traditional financing."
~ John C. Dugan, Comptroller of the Currency, "Remarks by John C. Dugan Before an OCC Credit Risk Conference," Atlanta, Georgia, October 27, 2005
(Appeared in Calculated Risk blog, "Remarks by John C. Dugan," November 9, 2005.)