OTS Looks Askance at Rising Neg-Am Loan Market

Adjustable-rate mortgage products with negative amortization features are appropriate for some borrowers but not for subprime borrowers, according to the top federal thrift regulator.

Office of Thrift Supervision director John Reich told the Exchequer Club that there is a market for payment-option ARMs and some thrifts have successfully offered this product for 20 years. However, federal regulators are worried about the sudden growth in option ARM originations by institutions with limited experience in managing the risks of these loans.

"Given the structural complexities and possible payment increases when the loan terms are reset, this product is not appropriate for unsophisticated borrowers or those with weaker credit capacities," Mr. Reich said. But he also stressed he does not want to "deprive qualified candidates from a homeownership opportunity by declaring it off limits."

Federal regulators issued guidance on interest-only and option ARMs in December and they have extended the public comment period on the guidance for 30 days to March 29.

Meanwhile, thrifts posted record earnings in the fourth quarter despite a 10% decline in single-family originations and slow demand for home-equity lines of credit.

OTS reported thrift originations totaled $164 billion in the fourth quarter, down from $181.3 billion in the third quarter. In the fourth quarter of 2004, thrifts originated $154.1 billion.

Home-equity lines of credit grew by only 1.3% in the fourth quarter to $90.5 billion as rising short-term interest rates cut demand.

The annual rate of growth in HELOC borrowings slowed to 15.7% in the fourth quarter of 2005 at OTS-regulated institutions from 68.3% in same period in 2004.

Despite lower loan volume, thrifts posted record earnings of $4.34 billion in the fourth quarter and for the year ($16.4 billion) due to a jump in mortgage servicing fees.

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