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Why Mortgages Blew Up

Such loan offers historically have been "a flexible financial tool for sophisticated financial households," says Doug Duncan, chief economist at the Mortgage Bankers Association in Washington D.C. And in that sense, these loans fulfill a real need and are particularly useful for borrowers who are paid unevenly in lump sums and don't receive a steady paycheck.

Senior investment bankers and lawyers would be examples of those with such an income stream. They often work for nominal base salaries throughout the year, with the overwhelming bulk of their total pay delivered in a single annual bonus check. With such swings in the size of each paycheck, the ability to make mortgage payments at different levels throughout the year is a distinct advantage.

In addition, condo-flippers might also find such option ARM loans useful -- although they likely weren't the type of buyer that lenders had in mind when designing such products.

"If a developer was coming in and buying up a whole bunch of properties and planning on selling them very quickly for a profit, then it might make sense," says James Holtzman, a personal finance specialist at Legend Financial Advisors in Pittsburgh.

These loans could also work for those starting out in a new job in a city with a high cost of living, such as San Francisco or New York, and where the borrowers would expect their income to quickly rise as they advance in their careers, Holtzman adds.

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