Here is the problem.
Regulators are issuing a "warning" which translates into banks cutting back on these types of loans. Since the vast majority of these loans are made in "hot markets" such as California, Arizona and Florida, the demand for housing will fall. Since the demand for housing seems to be falling anyway, the regulators are making problem worse. OF COURSE.
Plus, as ex-Texan will verify, mortgage fraud is particularly rampant in the exotic mortgage market as well. Why? Because it appeals to people who can't really afford a normal mortgage and may be desperate.
The fraud problem hits both borrowers and lenders (lenders as in major banks - the frauds are made by smaller lenders, some mortgage brokers, mortgage servicers). The default problem really causes problems for banks, Fannie and Freddie, NOT consumers.
This will be a windfall for mortgage brokers who aren't subject to this regulation.