'Exotic' mortgages tempt more buyers

In 2001, 1.5 percent of borrowers nationwide took out a loan with an interest-only option, according to data from LoanPerformance, a research firm in San Francisco. Last year, one-third did.

"The buyer can get much more home for their money," says Ron Porter, a buyer's broker serving California's Silicon Valley area. But "it may burn them in the long run. We make sure our buyers take a good look at their [financial] future."

Indeed, financial experts are sounding the alarm.

"We are really seeing people pushing their finances to the absolute limit," says Erica Sandberg of Consumer Credit Counseling Service of San Francisco. "They're using every dollar of their paycheck."

Some observers blame lenders for predatory practices, seducing consumers with introductory rates that hide the true cost of home loans. At least one lender has been sued for allegedly misleading consumers. And federal regulators are trying to make it harder for people to qualify for exotic loans, warning of the risk they pose to banks and borrowers.

Despite the hand-wringing, some see signs of assurance. Former Federal Reserve Chairman Alan Greenspan, for example, expressed concern in a speech last fall about the popularity of exotic mortgages. But, he added, "the vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices."

"I don't see a doomsday scenario here," says Alex Clark, with Hill & Co. Real Estate in San Francisco, who edits sfnewsletter.com. "People are not buying homes to stay in them forever."

The increased mobility of younger home buyers and the frequent turnover in the housing market probably mean exotic mortgages are here to stay, even if they cause financial hardship for some.

"The average life of a loan is only four years," says Teresa O'Dette, owner of O'Dette Mortgage Group in Tahoe City, Calif. "So why go 30-year [fixed-rate]?"

Go fixed, others say, because the difference in interest rates between an ARM and a fixed loan is so low these days. But in expensive markets across California, an option ARM may be the only way to afford a home. One-quarter of all the new mortgages and refinances in California last year had the negative-amortization option.

High home prices and exotic loans, experts say, are mutually reinforcing. Interest-only loans have been so popular in California because home prices had been appreciating so fast, says Kathy Matt, a senior loan officer with Associated Mortgage Group. "It's a completely different approach than our parents [had]."

That generational difference is worrisome to Mr. Hanson, the financial planner. "My biggest concern with these products is that yesterday's generation wanted to be debt free," he says. "Today's generation is very different."

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