Federal regulators recently suggested new guidelines for banks that originate certain types of high-risk mortgages. The banks, predictably, were not enthusiastic about the regulators' suggestions. But the regulators have it right: It's high time for banks to limit access to these mortgages and disclose the real risks to borrowers. The suggested guidelines would require banks to qualify borrowers for financing on the basis of fully indexed interest rates for interest-only and payment-option loans and to consider the borrower's ability to repay not only the original loan amount, but also any additional principal that may result if interest-only or minimum payments are made. Banks have objected that these guidelines would limit the number of people who can qualify for these loans. That's true and it's exactly the point. The borrower's ability to repay the loan should be a basic component of loan underwriting and to ignore it defies common sense. A borrower's ability to manage no more tha...
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