WASHINGTON, DC -- With American homeowners currently facing about $9 trillion in outstanding home loans, including roughly $425 billion in adjustable-rate mortgages that are due to reset this year to a higher interest rate, the Senate Banking, Housing and Urban Affairs Committee today held a hearing on exotic loans and their impact on homeowners and the U.S. economy. During the hearing, titled Calculated Risk: Assessing Non-traditional Mortgage Products, U.S. Senator Jack Reed (D-RI) examined the risk to borrowers using non-traditional mortgage products such as interest only and payment option loans and what actions can be taken to ensure affordable and sustainable homeownership. These non-traditional loans pose significant risks for many Americans. A recent Business Week article reported that 80 percent of borrowers are making the minimum payment on these kinds of loans, eroding their home equity with every payment, said Reed, the top Democrat on the housing subcommittee. At a time when housing prices are leveling, or even declining, in some parts of the country, many people who took out non-traditional loans may soon be left with few good options. As the real estate market cools and mortgage rates have climbed well above levels of recent years, more homeowners are entering into some stage of foreclosure. According to RealtyTrac, an online marketplace for foreclosure sales, 115,292 properties entered into foreclosure in August of 2006. That is a 24% higher than the previous month and 53% higher than the rate in August of 2005. Some of these loans were sold to less credit-worthy borrowers as a chance to buy into the American dream and own a home they couldn't otherwise afford. But as the teaser rates end and the adjustable mortgage rates kick in, more families are getting behind in their payments and facing default or foreclosure, said Reed. In fact, we are already seeing foreclosure rates escalating, with non-traditional mortgages defaulting at a higher rate than fixed-rate mortgages. In Rhode Island, for example, defaults on prime adjustable rate mortgages (ARMs) are 21 percent higher than prime fixed-rate loans. Subprime ARMs have almost a 40 percent higher default rate than fixed-rate loans. Our national economy is at significant risk if these loans fail in great numbers, as I fear they will, testified Michael Calhoun, president of the Center for Responsible Lending. Reed called for greater oversight that would require lenders to do a better job of educating consumers about the risks of non-traditional loans and recommended tighter credit standards for such loans. Guidance in this area is necessary and should be finalized promptly to ensure that lenders and financial institutions take responsibility for the long term sustainability of the loans they originate and ultimately to ensure safety and soundness of our financial system and to protect consumers, concluded Reed.