Released: June 11, 2006

New mortgages worry regulators

Source: By Kenneth R. Harney, Syndicated Columnist [Washington Post] (Free Registration)

They are the new breed of mortgages, and home buyers in high-cost real estate markets can’t get enough of them: interest-only and payment-option plans that cut monthly payments sharply in the early years of a loan.

Lenders have marketed both types of mortgages aggressively - often to people who need to stretch their incomes to afford homes - but have said often that their borrowers have solid credit histories and excellent credit scores and that they fully understand the risks once payments reset in a few years. In some parts of the country, the share of buyers using interest-only and payment-option loans has soared from the single digits two years ago to more than 50 percent in 2005.

But federal regulators worry that all is not well. Too few borrowers, they say, really understand the risks involved and have a solid grasp of how the loans work. Within weeks, a team of regulators led by the Federal Reserve and the comptroller of the currency is expected to issue new guidelines for mortgage lenders that could reduce the number of interest-only and payment-option loans being offered.

A new statistical study challenges some of the mortgage industry’s claims about borrowers’ sterling credit qualities. The Consumer Federation of America examined the case files of more than 100,000 mortgages closed from January to October 2005. The files contained detailed information on household income, credit scores, down-payment amounts, and racial and ethnic characteristics.

Read Full Article: New mortgages worry regulators