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Lenders Oppose Rule Changes

Stricter standards on nontraditional home loans would hurt buyers, they say.

April 14, 2006|From Bloomberg News

America's biggest mortgage lenders, including Bank of America Corp. and Countrywide Financial Corp., are fighting a federal proposal they say may stifle the market for some popular loans such as interest-only mortgages.

More than 100 banks and trade groups have written since December to the Federal Reserve and four other regulators, arguing against stricter standards on nontraditional mortgages that offer lower monthly payments.

"The proposed guidance certainly got the attention of the industry and could have more of an impact than some originally believed, if maintained in its current form," Credit Suisse analysts wrote in a note to clients this week about the reaction of mortgage lenders to the proposals.

Interest-only loans that don't reduce the outstanding balance on a mortgage "delay the day of reckoning" for consumers once principal payments come due, Comptroller of the Currency John Dugan said in December.

Banks say regulators haven't proved their point. Regulators failed to show that use of interest-only loans and payment-option adjustable-rate mortgages, in which a borrower's principal can grow, has resulted in higher delinquencies or bank losses, said Mary Jane Seebach, a managing director of public affairs at Calabasas-based Countrywide.

"In the absence of such data, we are concerned that certain aspects of the proposal could unnecessarily have the effect of inhibiting innovation in the mortgage industry and reducing the affordability of housing," Seebach wrote in a March 27 letter to the Office of the Comptroller of the Currency.

Mortgages that reduce initial payments were increasingly offered by lenders and pooled into securities by Wall Street as the decade-long U.S. housing boom drove home prices to record highs in 2005. For Countrywide, the biggest U.S. mortgage lender, payment-option loan volume rose 317% in 2005 to $95 billion, or 19% of its originations.

Balances on more than half of the $26.1 billion in payment-option loans retained by Countrywide last year increased as some monthly interest was folded back into the principal, according to a March filing with the Securities and Exchange Commission. Total negative amortization for 2005 was $74.8 million, up from $29,000 in 2004, the filing said.

Lenders objected to regulators' recommendations that they approve payment-option and interest-only borrowers only in a worst-case scenario, or one that assumes minimum payments are made for the maximum time allowed. That would "significantly" reduce the number of borrowers who qualify, wrote Seebach, who couldn't be reached for comment Thursday.

In one example of the risk to homeowners of such loans, Dugan said a person choosing the minimum payment on a typical payment-option mortgage of $360,000 with an initial interest rate of 6% would see the monthly payment rise to $1,600 from $1,200 in the first five years. That amount would soar to $2,500 at the start of the sixth year. A 2-percentage-point rise in interest rates would further increase the payment to $3,166 on the reset date, he said.

Such concerns have become more relevant as mortgage rates have climbed. The rate on the average 30-year fixed mortgage rose to 6.49% on Thursday, its highest level since mid-2002, according to mortgage finance giant Freddie Mac.

However, banks are worried that the regulators are paying too much attention to "payment shock" versus the benefits of enabling consumers to buy homes they might not otherwise afford.

"Prudently underwritten alternative mortgage products have also allowed some borrowers who might otherwise have been precluded from participating in the housing market to purchase homes," David Schneider, president of Seattle-based Washington Mutual Inc.'s home loan division, wrote in a March 29 letter posted on the Office of Thrift Supervision's website.

Representatives of the Fed, the Office of the Comptroller of the Currency and the Office of Thrift Supervision declined to comment on the lenders' concerns.

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