Lenders Defend Risk Management on 'Exotic' Loans

Federal banking regulators need to calm down and rethink their "unwarranted" and "excessive" underwriting restrictions on interest-only and payment-option mortgages, according to industry comment letters.

Remarks filed by the Mortgage Bankers Association, American Bankers Association, Consumer Mortgage Coalition and America's Community Bankers stress that regulators are overreacting to negative amortization and payment shock associated with these nonprime mortgages.

"Nontraditional mortgage products should not be singled out as necessarily riskier than other products. They simply present different kinds of risk," writes CMC executive director Anne Canfield in her comment letter.

Lenders have been originating and managing the risks of these ARM products since the 1980s. However, the proposed guidance "pays little heed to that experience," says the American Bankers Association.

IO mortgages and payment-option ARMs have been two of the hottest products in the mortgage industry the past two years.

According to figures compiled by Mortgage Servicing News, IOs now account for about 25% of industrywide production. POAs account for about 9%, according to the Alternative Products Quarterly Data Report.

"We believe this is an overreaction on the part of the agencies that will greatly restrict the availability of these mortgage products ... unless the guidance is materially revised," ABA says.

Industry commenters predict consumers will be forced to rely on unregulated non-depositories if banks and thrifts are forced out of the IO/POA market.

"Restrictions on regulated financial institutions would do nothing to control the practices of non-regulated entities," ACB says. The proposed guidance should be "substantially revised or withdraw," ACB president and chief executive Diane Casey-Landry said.

Separately, the Federal Trade Commission is beginning to focus on IOs and POAs, and soon may issue guidance for state-licensed mortgage bankers and finance companies.

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