home subscribe advertise reprints e-mail help RSS about us LOG IN

Mortgage News

 

Mortgage News

HOT Topics

production

servicing

compliance

legal

fraud

secondary

jobs

appraisal

site map

www.loan-academy.com/
twitter linkedin
facebook google+
Search:

Mortgage News

News by Subject
Complete list of specialty news sections.

Purchase Subscription
Subscribe to MortgageDaily.com and get immediate access to all news, statistics and archives.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Consumer Mortgage News
Free mortgage news for prospective borrowers.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from MortgageDaily.com.

Mortgage News Reprints
Put entire MortgageDaily.com stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed MortgageDaily.com stories free on your Web site or for your RSS reader.

News Archives
Archive of MortgageDaily.com stories by month going back to 1999.

Press Releases
Reports and announcements from MortgageDaily.com.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Directories
Directories of lenders, branch operators and mortgage service providers.

Mortgage Graphs
Directories of lenders, branch operators and mortgage service providers.

Mortgage Rate News | Mortgage Market Index | ARM indices | ARM Statistics
Average fixed and ARM rates. Rate forecasts. Quotes on ARM indexes including COFI, MTA, LIBOR & Treasuries. Rate reset studies and reports. Mortgage rate litigation.


ARM'd & Dangerous

Banking regulators warn about option ARMs, limited doc

December 21, 2005

By COCO SALAZAR


photo of Coco Salazar

A 42-page report from banking regulators warns about option ARMs -- especially those where a second mortgage was closed simultaneously. The report also suggests lenders be more prudent about handing out reduced-documentation loans.

The federal financial regulatory agencies announced Tuesday they issued for comment proposed guidance on nontraditional mortgage products, including interest-only mortgages and payment-option adjustable-rate mortgages.

While the regulators acknowledge innovations in the mortgage market benefit some consumers, they worry that nontraditional products are being offered to a wider spectrum of borrowers, including subprime borrowers and others who may not otherwise qualify for traditional fixed-rate or adjustable-rate mortgages or who may not fully understand the associated risks of nontraditional loans, according to the proposed guidance report.

"The Agencies recognize that many of the risks associated with nontraditional mortgage loans exist in other adjustable-rate mortgage products, but our concern is elevated with nontraditional products due to the lack of principal amortization and potential accumulation of negative amortization," they said in the report.

"In addition, institutions are increasingly combining these loans with other practices, such as making simultaneous second-lien mortgages and allowing reduced documentation in evaluating the applicant's creditworthiness," the agencies added.

The agencies expressed concern regarding the potential heightened risk levels nontraditional mortgages create for lenders, as regulatory experience with nontraditional mortgages has shown that "prudent management of these programs requires increased attention in product development, underwriting, compliance, and risk management functions."

The proposed guidance seeks to clarify how institutions can offer untraditional mortgages in a safe and sound manner, and in a way that clearly discloses the potential risks that borrowers may assume, the agencies said, adding that they "will carefully scrutinize institutions' lending programs, including policies and procedures, and risk management processes in this area."

The regulators specifically request comment on the proposed comprehensive debt service qualification standards, which would have lenders assess a borrower's ability to repay the debt by final maturity at the fully-indexed rate, assuming a fully-amortizing repayment schedule. For mortgages with potential negative amortization, the agencies suggest lenders' repayment analysis include the initial loan amount plus any balance increase that may accrue through the negative amortization provision, according to the report.

The proposed guidance also suggests lenders avoid using loan terms and underwriting practices that may result in the borrower having to rely on the sale or refinancing of the property once amortization begins. "Institutions determined to be originating collateral-dependent mortgage loans, may be subject to criticism, corrective action, and higher capital requirements," the agencies said.

Reduced documentation in underwriting, such as stated income, should be accepted only if there are other mitigating factors such as lower loan-to-value, the regulators proposed. Among other questions listed for comment, the agencies ask what specific circumstances would make using reduced doc appropriate in underwriting.

Because nontraditional mortgages have been marketed based on their near-term monthly payment affordability, prior to the consumer making a decision on a loan product or payment, lenders should communicate "clear and balanced information about the relative benefits and risks of these products, including the risk of payment shock and the risk of negative amortization." Advertisements, oral statements, promotional materials, and monthly statements, should be consistent with product terms and payment structures, the report said.

Among other things, the proposed guidance emphasizes that lenders recognize "certain nontraditional mortgage loans are untested in a stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves," according to an announcement.

Lenders that originate or invest in nontraditional mortgage loans were advised to adopt more robust risk management practices and manage exposures in systematic manner by developing written policies that specify acceptable product attributes, production and portfolio limits, sales and securitization practices, and risk management expectations; enhancing performance measures and management reporting that provide early warning for increasing risk; establishing appropriate allowance for loan and lease loss levels that consider the credit quality of the portfolio, as well as conditions that affect collectibility; and maintaining capital at levels that reflect portfolio characteristics, the proposed guidance report said.

The commentary period that will expire 60 days after publication in the Federal Register, said the agencies, comprised of the Federal Reserve, the Federal Deposit Insurance Corp., National Credit Union Administration, Office of the Comptroller of the Currency and the Office of Thrift Supervision.


Coco Salazar is an assistant editor and staff writer for MortgageDaily.com.

e-mail: [email protected]


SUBSCRIBERS: Edit Subscription | Subscription Help | or call 214.521.1300

Subscribe Contact Us Site Map

Copyright © 2017 Mortgage Daily, D a l l a s
Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

p r i c i n g engine directory

wholesale lender directory

More Mortgage News Resources (full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter

MBS

mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

real estate news

refinance news

reverse mortgage news

secondary marketing

social media

servicing news

subprime news

wholesale lenders