Some mortgage lenders say they need more time to respond to "extremely complex" proposed federal guidelines designed to tighten underwriting standards. The standards have been proposed to reduce the preponderance of so called "nontraditional" mortgages -- home loans deemed riskier than so-called "traditional" mortgages.

That doesn't mean some lenders aren't already making the loans harder to get. They are.

Anything but "nontraditional" in a current, more practical sense, interest-only, payment-option, piggy-back, no-, low-down payment and adjustable rate mortgages (ARMs) in general have become de rigueur -- especially in high-cost housing markets.

In some housing markets, the "traditional" 20-percent-down, fixed-rate, 30-year mortgage just doesn't cut it.

Nontraditional loans, as a group, make up the bulk of purchase mortgages in some markets, because they give buyers more financial leverage and the ability to buy a home they might not other wise afford. The loans have also been used to help historically under served socioeconomic and ethnic segments of the population buy homes.

The trouble is, say federal money market regulators, the loans can push border line borrowers over the edge. In today's market, rising interest rates and flattening home prices exacerbate financial weakness and compound a household's financial woes.

Home owners with properties worth less than their mortgage because of falling values and rising rates and those with little or no equity stake, because of low down payments and interest-only payments, are more likely to walk when the going gets tough.

If lenders write too many risky loans they could be left holding the bag and that could have a snowballing effect on the cost of loans and the cost to the economy.

Published in the Federal Register on Dec. 29, 2005, "Interagency Guidance on Nontraditional Mortgage Products" is not unlike "Credit Risk Management Guidance For Home Equity Lending" which the same federal agencies released earlier in 2005 to likewise target equity loans.

The Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision (OTS); and the National Credit Union Administration (NCUA), all helped author the proposals, the most recent of which came with a 60-day public comment period due to expire Feb. 27, 2006.

Last week, a month after the federal agencies published the second proposal, a community bank trade group, the America's Community Bankers (ACB) said the more than three dozen pages of proposal was too complex and ill-timed for a 60-day response. The group asked the feds for an extra 30 days to comment which would push the deadline to the end of March and the onset of the spring home-buying season.

"The beginning of the comment period coincided with the holidays. The proposal is extremely complex and has far-reaching consequences for our members, as well as for the nation's mortgage markets," said Janet Frank, director of the group's mortgage finance government relations section, in a prepared statement.

"We believe that it will take an additional 30 days to complete the necessary evaluation and collect comments and data from our membership. A 30-day extension would enable our association to provide the agencies with the most meaningful comments on the proposed guidance," she added.

Mike Ela, president of San Juan Capistrano, CA-based HomeSmart Reports said he's not surprised.

"There is a lot at stake ... lenders have to assess how much they will have to change their internal processes to accommodate more underwriting vigilance. More people, more automation, more physical space to accommodate added people, added programming requirements ... and any of the training that goes with it. It's compounded because they are asking more scrutiny on just the "interest only" loans and that means two sets of underwriting rules. That makes it tougher to implement," said Ela, who recently reported some lenders in California are already taking a closer look at higher-risk loans.

"The frenzy we saw in more coastal markets last year moved inland at the same time as interest rates were edging up. Some neighborhood sales patterns are showing signs of market stress, and buyers may be stretching their finances. Lenders are evaluating loan applications and appraisals much more carefully," said Ela.

HomeSmart Reports, for a fee, offers consumers local-market information designed to help them make well-educated home buying or selling decisions.

The proposed federal guidelines suggest, in part, that lenders:

• Assess borrowers' ability to repay the loan, including any balances added through negative amortization, at the fully indexed rate that would apply, not only initially, but also after the introductory period.

• Recognize that certain nontraditional mortgage loans are untested in a stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves.

• Ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.

Ela said lenders are not heel dragging, but trying not to give a knee-jerk response that could hurt consumers, perhaps even more than tighter underwriting.

"Basically, the regulators didn't give them enough time to respond. The lenders are just managing the expectations of the federal regulators to buy a little more time. They are saying, 'Let's assess the past and make sure that in the future this is more secure, in terms of everyone's underwriting policies. Further, that the policies don't put consumers at undue risk'," said Ela.

Published: February 1, 2006

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Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home. The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services. The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home. Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News. Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake. He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications. In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.