Feds Fret Over 2/28 Payment Shock

Federal banking regulators are discussing ways to supplement their nontraditional mortgage guidance so that the underwriting standards apply to 2/28 adjustable-rate mortgages, which also carry the risk of payment shock after the initial two-year rate expires.Sheila Bair, chairman of the Federal Deposit Insurance Corp., said 2/28 ARMs are "technically" not covered by the guidance issued in September by federal regulators. "We have been thinking in terms of maybe doing some kind of an advisory to complement the guidance," she told a Women in Housing and Finance luncheon in Washington. The Center for Responsible Lending, Durham, N.C., calls 2/28s "exploding ARMs." The consumer group has urged the regulators to act because 2/28s are generally underwritten based on teaser rates, and many borrowers cannot afford the fully indexed rate. Similar issues with interest-only and payment-option ARMs prompted the regulators to issue the nontraditional mortgage guidance. "We are very concerned about the increased reliance in the subprime market on loans that have a built-in payment shock," said CRL vice president Josh Nassar.