State questions risky loans

From the Record:

Mortgage risks worry regulators
By RICHARD NEWMAN

Banking regulators are increasingly concerned about consumers’ ability to withstand payment shock when rates go up on adjustable-rate mortgages.

Regulators also fear that borrowers may not have been adequately informed of the risks inherent in option ARMs and interest-only loans, which have surged in popularity over the past two years.

New guidelines issued last week by federal regulators require that banks do a better job informing borrowers of the risks, and take a more conservative approach in evaluating a borrower’s creditworthiness.

The key provision is that loans be approved based on the borrowers’ ability to make payments using an indexed rate that more accurately reflects the longer-term cost of the loan — not just the initial teaser rate.
…
But how much force the model guidance will be given at the state level will likely vary state to state. Some may adopt the guidelines as rules and regulations, with violators subject to penalties and fines. Others may adopt the guidance merely as, well, guidance. Either way, “we believe its sends a strong message to the industry,” Stevens said.

It is unclear what New Jersey will do.

“While we see a stable mortgage lending market, the department is very concerned about alternative mortgage products and is studying the issue,” New Jersey Department of Banking and Insurance spokesman Marshal McKnight said Thursday.

New Jersey was one of eight states that provided data for a Government Accountability Office study of option ARMs and interest-only loans. The GAO said in testimony to Congress last month that many of these loans have gone to people on the fringe of creditworthiness, and that those borrowers may have a hard time selling or refinancing if home values decline.

The federal agency estimated that such non-traditional mortgages rose from 10 percent of the overall mortgage market to 30 percent between 2003 and 2005.