Tuesday, August 29, 2006

Nontraditional Mortgage Guidance: 60 Days

by Bill McBride on 8/29/2006 11:57:00 AM

Matthew Swibel writes in Fortune on August 23rd: Dodging A Bullet

"A band of five government regulating agencies led by the Comptroller of the Currency, appear likely in the next 60 days or so to pour cold water on the hot--and lucrative--nontraditional mortgage loan market adored by banks and mortgage brokers. These include the popular, but deadly interest only and pay-option adjustable rate, in which borrowers decide each month how much to repay."
Swibel told me that the OCC is "growing frustrated by delays caused by other agencies" and is pushing hard for the release of the guidance.

UPDATE: This paper was released today by the OCC. OCC Working Paper 2006-1, "Foreclosures of Subprime Mortgages in Chicago: Analyzing the Role of Predatory Lending Practices," by Morgan Rose.

This paper suggests passage of the Nontraditional Mortgage Guidance as a possible regulatory action to address rapidly rising foreclosures due to subprime lending:
"A ... candidate for action would be encouraging subprime lenders to review and tighten their lending practices to ensure that their borrowers, especially those seeking refinances, are not taking on more debt than they can handle given their other financial obligations, and that all information relevant to a potential borrower’s ability to repay a loan is considered before extending a loan. This approach is consistent with the recently proposed Interagency Guidance on Nontraditional Mortgage Products, which encourages prudent loan terms and underwriting standards rather than restricting particular loan features. ... this approach has the major benefits of addressing the key role that this paper’s findings indicate low- or no-documentation plays, and being less likely to cause unintended and undesired distortions in the subprime lending market."