Such low introductory payments or teaser rates are offered in exchange for higher bills that will kick in years later, sometimes tripling or quadrupling monthly payments. Regulators said many of those riskier loans were taken out in 2004 and 2005 and will start resetting to higher rates this year.
"The exposure to these sorts of products, the growth, is unprecedented," Raphael Bostic, an associate professor at the University of Southern California School of Policy, Planning and Development, told a Senate committee. "The regulatory oversight of these types of practices is relatively lax."
Such loans have been offered to home buyers with shaky credit or lower incomes. In other cases, middle-income home buyers turned to them as California housing prices soared in recent years. Such buyers used option-payment adjustable loans and interest-only loans to purchase houses they would have difficulty affording using 30-year fixed mortgages.