Exotic mortgage products: The cost affordability

Abstract
Exotic mortgage products serve to increase origination volumes significantly by allowing borrowers to make lower payments for the initial years. In order to pursue their innovative product strategy banks have to adopt customer centric marketing strategy to engage them across the asset liability spectrum and make adjustments in their underwriting processes to mitigate credit risk. Investments also need to be made to create an IT infrastructure that would provide the ability to share data across lines of businesses, offer products aligned with the lifestyle of every customer, provide consistent customer service across channels and measure profitability for every customer. This paper discusses key exotic mortgage products and their impact on banks’ market and credit risk. It also suggests measures that could help banks manage these enhanced risks and the widening asset liability mismatch to ensure that the strategy of volume growth driven by affordability products is profitable and sustainable.

Author Amit Kumar

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