OTS Sounds Alarm on Lax Underwriting

Office of Thrift Supervision Director John Reich is sounding the alarm that some lenders are allowing their underwriting standards to slip and that examiners will be closely monitoring lending standards and credit quality.The OTS director says he is concerned that some banks and thrifts are increasing their reliance on wholesale lending and aggressively pricing loans due to competitive pressures. "We also are seeing an increased liberalization of terms by some institutions in order to maintain their loan volume," he told the New York Bankers Association. Examiners are paying close attention to loan documentation, pricing, loan-to-value ratios, and overall underwriting standards. "We are asking our examiners to dig deeper into loan portfolios to understand the risks individuals are assuming," Mr. Reich said. The OTS director also stressed that credit risk is an "additional element" of risk with interest-only and payment-option mortgages that is not present with traditional mortgages. Repricing of IO and option adjustable-rate mortgages can significantly increase monthly mortgage payments, as much as 100% on option ARMs. "Aggressive pricing and increasingly lax underwriting standards heighten these credit risks," the OTS director warned.