The federal financial regulatory agencies today issued for
comment proposed guidance on residential mortgage products that allow borrowers
to defer repayment of principal and sometimes interest.
These nontraditional 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 the 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 subprime borrowers
and others who may not otherwise qualify for more traditional mortgage loans or
who may not fully understand the associated risks of nontraditional mortgages.
The proposed guidance discusses the importance of carefully
managing the potential 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 nontraditional mortgage loans are
untested in a stressed environment and warrant strong risk management standards
as well as appropriate capital and loan loss reserves.
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 sixty days
after publication in the Federal Register. The guidance is attached.
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Media Contacts:
Federal Reserve Susan
Stawick (202) 452-2955
FDIC David
Barr (202) 898-6992
NCUA Cherie
Umbel (703) 518-6337
OCC Kevin
Mukri (202) 874-5770
OTS Erin
Hickman (202) 906-6677