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n the new millennium, the once conservative residential finance industry became a swirl of new kinds of mortgages, touted to hopeful homebuyers as the "easy" solution to getting the home they wished they could afford. There were buy downs, and hybrids, and option-type -ARMs. There were "Low-Docs" and "No-Docs" and I-O balloons. Then there were 100 percent HELOCs and skip-a-payment loans, and piggybacks and sponsorings for the down payment poor.

This loan party was hosted by glittering names like Countrywide, World Savings, Washington Mutual, IndyMac, and Wells Fargo, all apparently bent on demonstrating what competitive capitalism really meant. And the effect was dramatic! Though house prices soared, so did home ownership, to the highest level on modern record, pushing 70 percent. But innovativeness and competitiveness did not assure a successful business or a successful result, at least to the firm and community. While individuals may have profited richly from this housing and mortgage party, at the larger level, it became a drag. The party was fueled by uninterrupted home appreciation. When unsustainable appreciation began to sag, the results became painfully evident to the partiers, and then to everyone else who had to fear for their job.

The Party Has Ended

So what of these party hosts and their party favor mortgages? Of the top 20 I-O and option ARM lenders in the nation in 2006, 8 survived to 2012, 7 by 2015. The remainder have disappeared involuntarily through forced sale, bankruptcy, or closure by FDIC. Four of the top five have disappeared, including Countrywide, WaMu, Wachovia/World Savings, and IndyMac.

What of the "party" mortgages? Several of these "innovations" may have been "born to abuse," such as the option ARM and the "No-Doc" (no documentation loan), I-O balloons (interest-only with balloon payment), and the 100 percent (or more) HELOC (home equity line of credit). But many of the others, including I-O reset (interest-only with option to refinance), the piggyback (pairing a small second mortgage with a maximum 80 percent LTV first mortgage to avoid required mortgage insurance), and the hybrid (initially a fixed interest rate, then changing to an ARM), if used prudently, are useful additions to the tools of residential real estate finance. We examine most of them in this chapter. In time, after the partiers recover, some of the party favors actually will be worth keeping.

Is this a legal or ethical issue for Grace and Antonis? for the bank?

• Should the bank be more responsive in renegotiating the rate?
• Is the bank holding Grace and Antonis to a different standard than other borrows?
• If the bank is saying Grace and Antonis should honor the relationship they have with the bank, does the bank hold themselves to a similar standard? How many payments can a customer miss before foreclosure begins? Does the bank honor the relationship?
• Who owns the risk of the declining housing market?