Magazine article American Banker

Legislators Urge Final Mortgage Guidance: Current Disclosure on Alternative Products Is Called Inadequate

Magazine article American Banker

Legislators Urge Final Mortgage Guidance: Current Disclosure on Alternative Products Is Called Inadequate

Article excerpt

WASHINGTON -- Banking regulators and Senate Banking Committee members expressed concern Wednesday that the growth of alternative mortgage products could pose a problem soon for banks and borrowers.

Lawmakers from both parties urged regulators to finalize proposed guidelines released in December that would require banks to provide enhanced disclosures on such loans, arguing that some current disclosures are insufficient.

The lawmakers supported their case with a Government Accountability Office study released Wednesday that said lenders are following legal disclosure standards but do not convey adequately the enhanced riskiness of alternative mortgage products.

"Marketing material that we reviewed indicated that advertising by lenders and brokers may not clearly provide information to inform consumers about the potential risk" of alternative products, said Orice Williams, the GAO's director of financial markets and community investments, who testified along with regulators at a joint hearing of the Senate Banking housing and economic policy subcommittees.

"For example, one advertisement we reviewed promoted a low initial interest rate and low monthly mortgage payments without clarifying that the low interest rate would not last the full term of the loan," she said.

Lawmakers repeatedly cited statistics illustrating the growth of alternative mortgages, noting that they accounted for about 1.9% of all mortgages in 2000 and 36.6% last year. The products have been mass marketed inappropriately as an "affordability" tool so consumers can qualify for homes they otherwise could not afford, legislators said.

Sen. Wayne Allard, who chaired the hearing, said he is concerned consumers are unprepared for what happens when alternative mortgages reprice.

"In utilizing a nontraditional mortgage, borrowers bet on the fact that mortgage rates will remain stable and home values will continue to rise. This is crucial for them to be able to refinance their loan before it resets and payment shock kicks in," the Colorado Republican said.

During a hearing last week on the declining real estate market, the subcommittees noted increasing interest rates and falling home values. Sen. Allard warned Wednesday that such fluctuating market forces play a big factor in what borrowers ultimately repay.

"The cyclical nature of markets dictates that past rates of appreciation and record low interest rates can't continue indefinitely," he said. "If interest rates increased, a consumer may not be able to qualify for or afford the refinancing alternatives. Similarly, if home values have been stagnant or decreased, homeowners may ... owe more than its worth."

Sen. Jim Bunning, R-Ky., said, "It seems to me there has been a race to the bottom in underwriting standards for nontraditional mortgages in the last few years. Hundreds have granted larger loans to borrowers who are less able to afford them, and based on less documentation.

"Over the past two or three years have lenders used adequate underwriting standards, or did they get so loose with their money that significant numbers of borrowers are going to default unless they can sell in the current environment -- rising interest rates, less equity in their homes?" he asked.

Sandra Thompson the acting director of supervision and consumer protection for the Federal Deposit Insurance Corp., said it is too soon to tell.

"At this point in time we have not seen any specific signs that lead us to those conclusions that there will be huge amounts of defaults. Of course, a number of these loans still have not reset, and we will be watching very carefully in the next few years as they recast to see what happens," she said. …

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