NAR Worried About IO Loans, Payment Option ARMs
The National Association of Realtors is concerned about the growing use of interest-only and payment-option ARMs and is planning a consumer outreach effort for later this summer.
NAR made the decision last week to move ahead with an educational campaign on these controversial products which are gaining regulatory and national media attention.
According to figures compiled by this newspaper, IO production accounts for 21% of all loans funded in the U.S.
"We are going to provide educational brochures on these products," said NAR chief economist David Lereah, adding that the focus will be on IOs, payment-option loans and negative-amortization products.
Mr. Lereah said the pamphlets will be distributed to homebuyers through the nation's largest Realtors. "We're going to do this sooner, rather than later," he said.
In a statement, NAR president Al Mansell said there are "insufficient disclosures" being made by lenders on these "riskier loan products."
Meanwhile, federal banking regulators are drafting guidance to address the proliferation of IO and payment-option loans. They plan to issue this guidance to banks and their examiners this fall.
The Office of the Comptroller of the Currency and other regulators also are concerned about the underwriting of "low-doc" and "no-doc" loans where lenders do not verify the borrower's income or assets.
Regulators recently issued guidance on home-equity lines of credit because of loose underwriting practices. They have found some of these same problems on IOs and payment-option ARMs.
"Not that they are bad necessarily, but they have to be looked at to make sure the underwriting is being done correctly," said OCC spokesman Kevin Mukri.
The Federal Deposit Insurance Corp. supported the HELOC guidance because of rapid growth of this second-lien lending and because of concerns that lenders could collect nothing if the borrower defaults on the first mortgage.
OCC's chief economist is not so sure rising housing prices and the proliferation of exotic mortgage products necessarily adds up to a housing bubble.
There are so many features of this housing boom that are different from others that ended in recession and declining house prices, deputy comptroller Nancy Wentzler told reporters last week.
"There are fundamentals that suggest there are some reasons for the prices we are seeing," she said.
Just because banks and non-banks are offering new instruments, such as interest-only loans and payment-option ARMs, "doesn't mean they are bad," she said. "The question is how do they perform."
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