Agencies propose guidance on non-traditional mortgage productsMortgagePress.comInterest-only mortgages
The federal financial regulatory agencies have issued for
comment proposed guidance on residential mortgage products that
allow borrowers to defer repayment of principal and, sometimes,
interest.
These non-traditional mortgage products include interest-only
mortgage loans where a borrower pays no principal for the first few
years of the loan and payment-option, adjustable-rate mortgages
where a borrower has flexible payment options, including the
potential for negative amortization. Institutions are also
increasingly combining these mortgages with other practices, such
as making simultaneous second-lien mortgages and allowing reduced
documentation in evaluating an applicant's creditworthiness.
While innovations in mortgage lending can benefit some
consumers, the agencies are concerned that these practices can
present unique risks that institutions must appropriately manage.
They are also concerned that these products and practices are being
offered to a wider spectrum of borrowers, including sub-prime
borrowers and others who may not otherwise qualify for more
traditional mortgage loans or who may not fully understand the
associated risks of non-traditional mortgages.
The proposed guidance discusses the importance of carefully
managing the potentially heightened risk levels created by these
loans. Toward that end, management should:
• Assess a borrower's ability to repay the loan, including
any balances added through negative amortization, at the fully
indexed rate that would apply after the introductory period. The
agencies recognize that this requirement differs from underwriting
standards at some institutions and are specifically requesting
comment on this aspect of the guidance;
• Recognize that certain non-traditional mortgage loans are
untested in a stressed environment and warrant strong risk
management standards as well as appropriate capital and loan loss
reserves; and
• Ensure that borrowers have sufficient information to
clearly understand loan terms and associated risks prior to making
a product or payment choice.
Comment is requested on all aspects of the guidance,
particularly on the section regarding comprehensive debt service
qualification standards. Comments are due 60 days after publication
in the Federal Registrar.
For a copy of the proposed guidance, visit www.fdic.gov/news/news/press/2005/pr12805a.html.
