During the recent housing boom, faced with soaring home prices and rising interest rates, many borrowers have sought to lower their debt service obligations by turning to mortgages with nonstandard payment and amortization schedules. Much of the new loans extended in the past two years have been nontraditional mortgages, including adjustable-rate mortgages with teaser rates and negative amortization features.
At the same time, some banks have weakened proof of income and appraisal standards, and did not fully assess borrowers' ability to pay when interest rates rise and full amortization begins. In addition, a fair share of the recent lending with nontraditional products has been in the subprime market. Net housing wealth (as a multiple of income) also jumped over the same period.