Feds to tighten 'exotic' real estate loan rules

March 30, 2006

Mortgage bankers' group says proposed guidance 'too prescriptive'

Janis Mara
Inman News

Proposed federal guidelines on nontraditional mortgage loans are too specific and overbearing in mandating underwriting standards for lenders, a major mortgage brokers' organization said Wednesday.

The Mortgage Bankers Association (MBA) said it believes the guidance on exotic loans is a good idea, but criticized the proposed new guidelines, released in December by the Office of the Comptroller of the Currency, as "overly prescriptive in mandating specific underwriting standards," also saying some sections should be clarified or removed.

Nontraditional mortgage loans such as interest-only and certain adjustable-rate mortgages have become popular over the last few years as soaring home prices made it more difficult for consumers to afford homes. Though such loans often served the purpose, they have come under criticism from federal officials including then-Federal Reserve Chair Alan Greenspan and the Comptroller of the Currency.

In a December speech to the Consumer Federation of America, Comptroller John C. Dugan said that negative amortization of consumer loans "raise substantial -- and intertwined -- consumer protection and safety and soundness issues."

That same month, the OCC issued its Proposed Interagency Guidance on Nontraditional Mortgage Products.

On Wednesday, the MBA sent the OCC an 18-page letter commenting on the guidelines.

Recognizing the likelihood of "payment shock" with payment-option adjustable-rate mortgages, where the borrower makes minimum payments until the loan begins to amortize, the guidelines recommended, "For all nontraditional mortgage products, the analysis of borrowers' repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule."

The MBA said it believes this language is too prescriptive, will force credit lenders to apply credit policies inconsistent with risk, and would likely be applied differently by different regulators at different times.

The MBA said the guidance infers that lenders should apply the same policies to both interest-only and payment-option mortgages, products that are treated differently by lenders in terms of credit policy; holds federally regulated institutions for the marketing practices of third party originators such as brokers, which is beyond their power to control; includes language asserting that voluntary repurchase of loans constitutes "implicit recourse" requiring risk-based capital be maintained against the entire portfolio.

The MBA also said the guidance creates additional disclosures that would create an even more fragmented system for consumers rather than using the Federal Reserve's regulatory authority under the Truth in Lending Act or working with the Department of Housing and Urban Development on the Real Estate Settlement Procedures Act to improve and standardize disclosures for all consumers.

"Innovative mortgage products enable consumers to become homeowners, and we want to ensure that guidance on these products maintains the safety and soundness of federally-regulated institutions without disrupting mortgage market innovation or curtailing consumer access to financing," said Kurt Pfotenhauer, senior vice president for government affairs at MBA, in a statement. "Secondary market investors, through pricing, have already required lenders to address many of the concerns identified by the federal regulators."

Copyright 2006 Innam News

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