Interest Rate Roundup

Thursday, January 11, 2007

Fed's Bies sounds off on high-risk mortgage lending

There's not much "new" news here. But Federal Reserve Governor Susan Bies is warning today about several high-risk lending practices regulators are seeing in the mortgage market at a National Credit Union Administration conference. Low-or-no-documentation mortgages ... interest-only financing ... no-money-down lending. We've seen it all explode in recent years, and that's leading to some serious credit concerns. Here's just one excerpt from the Bies speech:

"Supervisors have also observed that lenders are increasingly combining nontraditional mortgage loans with "risk layering" practices -- such as by not evaluating the borrower's ability to meet increasing monthly payments when amortization begins or when interest rates on adjustable rate mortgages rise due to indexing or at the end of a "teaser" rate period. We are also seeing more frequent use of limited or no documentation in evaluating an applicant's income and assets.

Although some lenders may have used elements of nontraditional mortgage products successfully in the past, the recent easing of traditional underwriting controls and the sale of some types of nontraditional products to subprime borrowers may generate losses on these products greater than has been observed in the past. Additionally, information from other sources seems to indicate that more borrowers are purchasing real estate with no equity down payment by using simultaneous second liens. The greater prevalence of risk-layering practices and sales of nontraditional mortgage products to non-prime borrowers have occurred in the past few years as competition for borrowers and declining profit margins has prompted lenders to loosen their credit standards to maintain loan volume in a slowing environment."


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