The Comptroller of the Currency - John Duggan - has recently given a speech (note: pdf) where he discussed the growth of exotic mortgages in the last few years. The Comptroller of the Currency is one of the leading regulators of US banks, along with the Fed. This speech shows that even regulators - who have been effectively “asleep at the stick” for the last few years while the housing and mortgage bubble was blistering - are now getting worried about the state of mortgage finance. Per Mr. Duggan:

• 5% of mortgage originations in 1994 were sub-prime; that is now up to 20%.
• Interest-only and payment-option ARMS were 2% of loan originations in 2000, they now account for 40%.
• 20% of payment-option ARMs originated in the past two years have loan value greater than home value, a figure that would double to 40% if home prices were to decline another 10%. Thus many mortgage holders have significant negative equity in their homes.
• 50% of the sub-prime market is now made up of ‘stated income’ mortgages where “the borrower pays the lender not to verify the borrower’s stated income on the loan application, making it possible for the borrower to artificially inflate the size of his or her income in order to qualify for a bigger mortgage.”
• A study by the Mortgage Asset Research Institute found that 60% of applications for these ‘stated income’ loans exaggerated income by at least 50%.
• The increase in debt-servicing (”payment shock”) coming from negative amortization mortgages can be severe: if rates are reset even only by 2 percentage points the payment increase will amount to a near doubling of the amount of the initial monthly payments.

Image borrowed from Calculated Risk.