The mortgage industry is fighting reform. "Excess restrictions on such nontraditional home loans as interest-only and payment-option mortgages risk stifling the market, industry groups said. The Mortgage Bankers Association and America's Community Bankers warned in separate letters that too many rules might restrict innovation."

"'The American consumer could suffer greatly from any guidance that imposes unduly restrictive standards on the use of these mortgage products,' the industry group America's Community Bankers said. 'Such restrictions could result in lenders' being less willing to offer alternative mortgage products and this would severely limit the flexibility in financing options that consumers enjoy today,' the group added."

"The Mortgage Bankers Association said lenders who took on too much mortgage risk will face market punishment in the form of price disadvantages. 'The private market can and does correct for excess risk more quickly than can a regulator who necessarily must move at a more deliberate pace,' the mortgage lenders' group said."

"'We believe that the types of mortgages that are the subject of the proposed guidance should be referred to as 'alternative' mortgages instead of 'nontraditional' mortgages,' the community bank group said. 'While it is the lender's responsibility to provide borrowers with sufficient information for them to clearly understand the loan terms and associated risks, we do not believe it is appropriate or possible for the lender to identify or dictate the best mortgage product for individual consumers,' the group said."

"The community bank group said it appreciated regulators' concerns that underwriting standards may have slipped at the same time as real estate markets in some areas are softening."

"Julie Bush, an attorney with the FTC's bureau of consumer protection, says these alternative mortgages have been around for a while, perhaps 50 years in the case of payment-option ARMs, but were used only by the wealthy. Nowadays they're being sold as 'affordability products' to typical homeowners."

The Early Show reported on a typical homeowner this morning. "With interest rates on the rise, and the housing market showing signs of a downturn, homeowners are starting to feel the squeeze. For many, the trouble started when the market was booming, and buyers flocked to interest-only loans in order to find their way into a bigger home."

"Meghan and Vince Jordan recently moved in to their brand new dream home in Denver, but they have one big problem, they can't get rid of their old one. 'A year ago, we don't think we would have been in this situation. We think our house probably would have sold,' said Meghan Jordan."

"Their home has been on the market since August, and so far they have dropped the price by $35,000. Now, the Jordans have taken a bridge loan to cover the costs of owning two homes. Even more nerve racking, they've taken out an interest-only loan, so for five years they are only paying interest. With rates on the rise, they are worried they took a bad risk."

"'That is the $90,000 question, what if (rates) don't come down? You are going to see people with properties with rates that can potentially double,' said Vince Jordan. The Jordans are highly leveraged, and their quandary is not unusual"

"First, a look at the risk that comes with an interest-only loan. If, for example, a borrower took an interest only loan of $200,000 in 2003, their monthly payment would have been around $667. After the first adjustment, those monthly payments could jump to $1,415 in 2006."

"'That's why (interest-only loans) are right for some but wrong for a lot of people. That payment increase is not something the average American household can handle. The increase is a byproduct of two of things,' Greg McBride said. 'The initial interest rate of 4 percent when you borrowed the money now jumps to something over 7 percent. You also have to start paying back that principal. You could see another payment increase next year. After all, interest rates are still rising.'"

"McBride stresses the importance of cutting into the loan balance and starting to build up what he calls an equity cushion. 'They were 100 percent leveraged,' he said. 'They need to start chipping away at the loan balance, building up an equity,' which is so important because 'if you have to sell suddenly, that's what's going to absorb your transaction cost.'"

"'If you are the type that's going to go out and run up additional credit card debt it's best to leave that home equity untouched,' he said. This means no home equity lines of credit to pay off credit card bills, no cash-out mortgage refinancing to pay for home improvements, and no tapping into home equity to pay for goodies like vacations. To do so would mean eroding your protection for when home prices decline."

"'You can't bank on home appreciation to do your saving for you. It's time to put the noisemakers and punch bowl away because the party is over on that end,' said McBride."