Tighter Standards Coming for Risky Mortgages

New guidelines for nontraditional mortgages will be released this fall, with the goal of clarifying loan terms and tightening standards. Kathryn Dick, deputy comptroller of the Office of the Comptroller of the Currency, told the Senate Banking Committee earlier this week that the OCC reviewed marketing materials for interest-only and payment-option adjustable-rate mortgages and discovered that lenders were stressing the low initial payments. Borrowers likely did not understand that their payments could rise dramatically down the road, she said. "There should be no equivocation about the risks of negative amortization and payment shock, if that's what the product entails," Dick said.

The guidelines — which are opposed by the banking industry because they would apply just to federally insured banks, potentially giving others a competitive edge — would force lenders to tighten underwriting standards by avoiding low-documentation loans in most instances and ensuring that borrowers will be able to afford the payments when they rise in the future.