Federal banking regulators today published new guidelines for banks to follow when originating and underwriting “nontraditional” or “exotic” mortgages that carry potential payment shock for borrowers.
Many in the loan industry cite these mortgages as major contributors to the nation’s home-ownership boom as they have enabled many borrowers to purchase in high-priced markets where traditional mortgages were out of reach.
The new guidelines retain disclosure and underwriting provisions that some banks had objected to as too restrictive, including a requirement that lenders qualify borrowers at the fully indexed rate for interest-only and payment-option loans.
As Inman News reported last week, the new guidelines will require lenders to analyze a borrower’s ability to repay not only the initial loan amount, but also any additional principal that may accrue in the case of a payment-option loan with negative amortization.
Testifying before members of the Senate Banking Committee last week, Kathryn E. Dick, deputy comptroller of the Office of the Comptroller of the Currency, said, “Underwriting standards that do not include a credible analysis of a borrower’s capacity to repay their entire debt violate a fundamental principle of sound lending and elevate risks to both the lender and the borrower.”
That could mean fewer borrowers will qualify for nontraditional loans that many in the banking and real estate industry say have helped buyers purchase homes they would not have been able to afford using a traditional mortgage.
Some borrowers may also be scared away by new disclosure requirements that spell out how monthly payments will increase if borrowers choose to make minimum payments or if interest rates adjust. Dick said last week that the new guidelines will allow “no equivocation about the risks of negative amortization and payment shock, if that’s what the product entails.”
The banking industry was critical of the guidelines as they were proposed in December 2005, saying they are too restrictive and should apply to all lenders, not just federally insured institutions.
Bankers have said new disclosure requirements should be incorporated into rules that apply to all lenders, such as the Truth-in-Lending Act or the Real Estate Settlement Procedures Act, to avoid giving unregulated institutions a competitive advantage.
Although the Mortgage Bankers Association and individual lenders had been vocal in their opposition to the proposed guidelines, none of those contacted by Inman News Friday would comment on the final version of the guidelines. The guidelines, along with proposed illustrations of consumer disclosures and guidelines for assessing credit risk on home-equity loans, have only been public for a short time and are lengthy documents. Comments on the illustrations of consumer disclosure will be accepted for 60 days.
In a statement, Washington Mutual’s president of home loans, David Schneider, said WaMu is “still analyzing the Guidance so we don’t want to speculate on what, if any, impact the new guidelines may have on our business practices.”
But Schneider said all mortgage originators should be held to the same standards, and WaMu is encouraging “state regulatory authorities to follow suit and issue the same guidelines so that consumers receive consistent disclosures and lenders have an even playing field.”
Dick said last week that states are expected to adopt similar guidelines for mortgage brokers and lenders, citing a recent announcement by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.
The federal guidelines were developed by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., the National Credit Union Administration, and the Office of Thrift Supervision.