Federal regulators directed banks today to properly explain the risks posed to borrowers from interest-only and other nontraditional mortgages.

The regulators said that banks needed to make sure that the loans they made were “consistent with prudent lending practices, including consideration of a borrower’s repayment capacity.”

There has been an explosion of nontraditional loans in recent years, raising worries about the risks to the financial system should there be a sizable number of defaults if borrowers are unable to meet rising mortgage payments.

“Mortgage delinquency rates are rising and foreclosure rates are also beginning to pick up.

But the Mortgage Bankers Association said that delinquency and foreclosure rates remained “well with the range of historical norms.” The organization criticized the regulators’ action.

“The guidelines propose a one-size-fits-all underwriting standard that will unnecessarily choke industry innovation and diminish consumer choice,” said Regina Lowrie, chairman of the mortgage group.

But these types of loans also expose borrowers to far greater risks. (Read More)

Source: The Seattle Times: Real Estate

Tags: Mortgage News