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Fed Governor: Exotic Loans Not a 'Huge' Concern

Residential funders have been making "stated income" mortgages for years, but the Federal Reserve is starting to have concerns about banks that originate loans without the borrower providing proof of income.

Speaking at an American Law Institute-American Bar Association meeting, Federal Reserve Gov. Susan Schmidt Bies said banks "are not focusing" on appraisals, and seem more concerned with cash flow than the underlying collateral.

"We're also seeing more loans made to investors," she said.

Ms. Bies said regulators are concerned about low teaser rates on adjustable-rate "exotic" mortgages including interest-only and payment-option loans.

Asked by Mortgage Servicing News whether these products are a huge concern, Ms. Bies said no, but the Fed is worried about how the products are being marketed to consumers.

In particular, there is alarm about how exotic mortgages are configured and sold to the public.

She said in some cases hot new products are being sold by banking employees who are compensated based on sales but without a concern for compliance. "In some cases [human resources] is never brought in," said Ms. Bies.

Many top-ranked nonprime lenders are affiliated with depositories or sell their loans through the investment banking arms of banks.

Ms. Bies told the ALI-ABA gathering that "to make sales happen faster" lenders are "lifting mitigating controls."

The Fed and other regulators have issued proposed guidance on exotic mortgages, but final guidance will not come until after the Feb. 27 comment period ends.

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