Clamping down on risky loans

From Reuters:

US regulators finalize rules on exotic mortgages
By Al Yoon

Federal banking regulators on Friday finalized rules for underwriting “exotic” mortgages, a move that the biggest U.S. lenders say may stifle the use of loans that make houses more affordable.

The Office of the Comptroller of the Currency, the Federal Reserve and other regulators kept intact a proposal that says banks must qualify borrowers for pay-option and interest-only loans at a “fully-indexed” rate — the highest rate that they could incur over the life of the loan. That will help ensure consumers don’t get loans they can’t repay, regulators said.
…
“The regulators have gone out there and restricted some of the marginal players,” said Paul Miller, a mortgage industry analyst at Friedman Billings Ramsey in Arlington, Virginia. “But a lot of the guidance is already being done. Banks haven’t just been just waiting for the regulators.”

From Dow Jones:

Bank Regulators Want More Scrutiny On Exotic Mtges
By Damian Paletta

In an effort to address concerns raised over the rapid growth in exotic mortgage products, federal banking regulators on Friday issued new guidelines that warn lenders to take greater steps in determining whether borrowers could ever pay off the debt.

In some ways, the guidelines were a rebuke to the lending industry, which had asked the agencies for more flexibility and less prescription. Lenders have frequently pointed to relatively low foreclosure and default rates on these loans to date, though both numbers are expected to rise.
…
Howard Glaser, a mortgage-industry consultant who was a senior housing official in the Clinton administration, said the guidance would likely have an immediate effect on the lending industry.

“What has been a tidal wave of exotic loan products should slow to a trickle,” he said. “It’s been the Wild West in the lending industry for the past couple of years.”