The LA Times looks at a firm writing exotic loans. "For much of its 77 years in Santa Monica, First Federal Bank of California led an unremarkable existence. Nowadays First Federal is stirring up more excitement, on account of its emphasis on making relatively risky home loans. In fact, to listen to some Wall Street skeptics you might conclude that this sleepy savings and loan has taken a figurative dive off the end of the Santa Monica Pier."

"Critics accuse First Federal and other West Coast thrifts of overindulging borrowers' lust for artificially low initial payments. By generating so-called exotic or nontraditional mortgages, they warn, these S&Ls have allowed speculators to buy homes they can ill afford, and will be unable to resell when the mortgage payments rise and home prices take a tumble."

"'"I think this spring you will see housing prices crack,' said Richard Bove, a banking analyst. That, he added, 'is going to be terrible' for people with mortgages that let them pay less, sometimes a lot less, than the full monthly payment during the early years of the loans. After those payments are reset to their full amounts, 'I think you're going to see a wave of defaults,' Bove said."

"Regulators, consumer advocates and skeptical investors have raised questions about the deferred-interest loans, formally known as payment-option adjustable-rate mortgages, or option ARMs for short. Many lenders larger than First Federal offer option ARMs, but First Federal has taken to them like few others. Of all the home loans that Washington Mutual held at the end of 2005, 52% were option ARMs. Golden West and Downey said more than 90% of their loans were option ARMs. At First Federal, 100% of residential mortgages were option ARMs."

"Nationally, 26.4% of mortgages allowed for interest-only payments last year, up from 1.1% in 2000. First Federal has benefited from this trend, doubling in size from $4.8 billion in assets at the end of 2003 to $10.5 billion at the end of 2005. 'Low doc' and 'no doc' loans also fueled its boom, by the end of last year, 4 of 5 First Federal borrowers got credit without having to document their earnings, their assets or either."

"Nontraditional mortgages have drawn attention from federal bank regulators, and the new rules have not been finalized. But federal examiners from agencies including the Office of Thrift Supervision, the Treasury Department division that regulates S&Ls, aren't waiting for them to take effect, said banking lawyer Stuart Stein."

"'The OTS is already walking into shops that have these loans and is essentially demanding that these institutions take action,' Stein said. 'What I'm seeing from all the agencies is that they're incredibly concerned about risk on the balance sheet, especially these low-doc and no-doc loans.'"

And a reader posted this related advice column. "Question: About a year ago, we bought our home with the help of an adjustable rate mortgage at 1.95 percent interest. We knew it would adjust after six months to 4.95 percent interest. However, when we received the lender's Internal Revenue Service 1098 year-end report, we learned our mortgage balance has grown by about $7,800. When I called the lender, I was told the increase was 'unpaid interest.' What's that?"