Released: September 21, 2006

Senators criticize regulation of new mortgages

Source: By Kirstin Downey, Washington Post (Free Registration)

At a Senate Banking Committee hearing yesterday, legislators and consumer advocates prodded federal banking regulators to move more quickly to put restrictions on non-traditional mortgage lending, because, they said, the new kinds of mortgages may place borrowers and lenders at financial risk.

“It seems to me there’s been a race to the bottom” in lending standards, said Sen. Jim Bunning (R-Ky.). He said that consumers don’t seem to understand the new products, and that if real estate values continue to fall, the market “pullback” could become “a prelude to a crash.”

“There’s a plethora of new products that are destroying the lives of a whole lot of people,” said Sen. Charles E. Schumer (D- N.Y.). “These were intended for rich, sophisticated buyers but they have been sold to the least sophisticated and most vulnerable.”

The popular loans, which include various adjustable-rate mortgages, interest-only loans and what are called “option” adjustables, share a common feature in that they allow borrowers to pay less money now but require them to pay more, sometimes much more, later. Monthly payments could double or triple when borrowers are required to pay the full interest and principal on the loan, several years down the road. About half of all non-traditional loans now require borrowers to pay a hefty fee, known as a prepayment penalty, if they try to sell the home or refinance to get better terms, according to George Hanzimanolis, a mortgage broker who spoke at the hearing.

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