Federal banking regulators are proposing a capital surcharge on nontraditional mortgages to address negative amortization as part of a new risk-based capital regime called Basel Ia.The Basel Ia is designed to be more risk-sensitive than the current Basel I standard by incorporating loan-to-value ratios and increasing the risk buckets for one- to four-family mortgages. The funded portion of an interest-only or payment-option mortgage would be treated like any other mortgage. However, there is an additional capital charge for the "unfunded portion of the maximum negative amortization amount" in nontraditional mortgages, according to the Federal Deposit Insurance Corp. Currently, the lowest credit risk weighting for 1-4s is 50% and the highest is 100%. Under Basel Ia, the lowest risk weight is 20% on loans with 60% LTVs or less and 150% for loans with LTVs above 95%. (Loan-level private mortgage insurance lowers the LTV.) Adoption of Basel 1A would be optional for most banks, except for certain institutions sticking with Basel I to avoid higher capital requirements, an FDIC official said. The FDIC board has approved the Basel Ia proposal, but it won't be issued for a 90-day comment period until later this month or January.

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