Exotic Loans Bad Deal for Low Income Families

We have a conventional, boring mortgage. Nothing exotic about it. Thirty years, fixed interest rate. We did refinance twice when interest rates were going down, but that’s about it.

Here in Colorado, however, more people have been signing up for a variety of loan “products” that can set families up for disaster. Interest-only loans, piggy-back loans, adjustable mortgage rates, and other types of loan offer lower payments for home buyers initially, but can mean huge payments later-payments that they can’t always afford. Today news came that in June, Colorado yet again earned the dubious distinction of having the highest foreclosure rates in the country for the sixth month straight. One out of every 280 homes occupied homes in the state are in foreclosure.

An industry-sponsored focus group of Denverites conducted by Public Opinion Strategies last September on non-traditional mortgages obtained by Muckraking Mom gives fuel to the idea that locally low income families are hurt disproportionately by these exotic loan products.

According to analysis of the focus group, “lower income participants did not feel that fixed rate mortgage was even an option for them. They had no choice but to secure an exotic mortgage or they would not have a home, either because of credit difficulties, lack of cash, or the high-priced housing market. Participants make the assumption that they will be able to refinance a couple of years down the road.”

What’s more, when focus group participants were given the dirty details on just how much money they would owe with these exotic products, they “used words like ‘shocking’ and ‘wow’….This was entirely new information to them, and the size of the increase in payments was rather stunning.”

A notable number of the low-income Denverites said they would have trouble making payments on their loans if they went up as detailed. Many assumed they would either refinance their home or sell it if they couldn’t keep paying. But “what they do not always recognize are the difficult circumstances surrounding either of those options-they do not seem to fully appreciate the costs or problems associated with refinancing, or that they may be “stuck” with a home for a period of time before it sells.” Muckraking Mom will be staying on this story.