Final 'Guidance' on Exotics Weeks Away

Federal banking regulators told a Senate panel Wednesday that they will issue final guidance on interest-only and payment-option mortgages in the next few weeks.Late last year, regulators issued proposals to enhance underwriting standards and consumer disclosures, but never finalized guidance because they were hung up on the treatment of negative amortization on payment-option adjustable-rate mortgages. The original proposal requires a lender to assume that the borrower will make only the minimum payment possible, calculating the potential negative amortization. The lender must then add that figure to the loan amount for purposes of qualifying a borrower. Industry groups complained loudly about this underwriting requirement, contending that there is no evidence to support such an assumption. Bank and thrift regulators have collected data showing that 70% of option ARM borrowers make the minimum monthly payment possible. Regulators conceded that defaults on exotics are not much higher than those on traditional loans, but noted that the product is unseasoned and that many outstanding loans have yet to reset.