The North Carolina Banking Commission recently proposed stricter guidelines for state regulated brokers, bankers and lenders offering nontraditional loans.
Minnesota has already tightened its lending guidelines on the loans and recently notified more than 3,000 state-licensed residential mortgage originators of the changes.
To date, 19 states and the District of Columbia have at least warned state-regulated lenders about the hazards of nontraditional mortgages, indicating new federal guidelines for federally regulated lenders are already trickling down to state regulatory offices.
That could put the American Dream out of reach for some borrowers with border-line credit histories or high debt-to-income ratios, but it could also help others avoid the agony of foreclosure.
The newly released "Conference Of State Bank Supervisors'/American Association Of Residential Mortgage Regulators' Guidance On Nontraditional Mortgage Product Risks" offers strict advice for tens of thousands of state-licensed lenders and mortgage brokers nationwide.
The advice is similar to the new rules in the federal Interagency Guidance on Nontraditional Mortgage Products" and "Credit Risk Management Guidance For Home Equity Lending" issued last fall to address the danger of nontraditional mortgages to both consumers and the lending industry.
“We are hopeful the interagency guidance and parallel state-issued guidance will serve to inform and protect consumers and enhance the safety and soundness of the industry” said Neil Milner, president and CEO of CSBS.
The federal and state rules, in part, call for lenders to:
- Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower's repayment capacity.
- Recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. These products warrant strong risk management standards, capital levels commensurate with the risk, and an allowance for loan and lease losses that reflects the collectibility of the portfolio.
- Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.
The rules are designed to curtail the rise (during the past housing boom) in the risky business of "nontraditional," "alternative," "exotic," even "toxic" mortgages, including interest-only, payment-option, piggy-back, stated-income (no-doc) and other types of adjustable rate mortgages (ARMs), as well as some home equity loans.
The high-leverage products can be useful, allowing borrowers to buy a home (or qualify for a larger, more expensive home) they perhaps couldn't afford with a standard, fixed rate loan (FRM).
However, the rapid growth in the use of nontraditional mortgages, especially among the population of less creditworthy borrowers has alarmed regulators who have begun to mandate that lenders tighten requirements for those who want the loans.
While the new rules could squeeze some borrowers out of the market, the guidelines are too late for some 2.2 million subprime holders a new report says already lost their homes in 2006 or will face foreclosure in the next few years.
"Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners", released in December by the Center For Responsible Lending, is a grim analysis of more than 6 million subprime loans, originated from 1998 to 2004, totaling $1.2 trillion and representing 70 percent of the U.S. subprime market.
The report says approximately, one out of five (19 percent) subprime mortgages originated in the last two years will end in foreclosure, and go down as the worst foreclosure rate in modern mortgage market history.
