Editorial: The Backside of Homeownership.(Editorial)

Amazingly, the performance of home loans has remained historically strong despite the proliferation of new and sometimes risky mortgage products. But there are some cracks showing up in industry data, and lenders need to prepare for an increase in potential problem loans.

Since home prices have risen dramatically, many people have turned to payment-option ARMs, interest-only ARMs, 40-year amortization schedules and other creative financing tools to stretch their buying power. While these tools have helped put homebuyers in homes they otherwise might not have been able to afford, the loans often present risks such as escalating payments that are absent from 30-year, fixed-rate loans.

And therein lies the rub. The industry's loan originators helped people get into these homes, but it's the servicers who may need to step to the plate and help people stay in their homes when the loans start adjusting. And if people can't refinance into a more affordable loan or keep making their payment, it's the servicer who'll have to help them find the best exit strategy, such as a short sale or other foreclosure alternative. The specter of foreclosure may loom over many borrowers as the housing market slows and interest rates edge up.