NCUA Joins In Caution Over Certain Mortgages

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NCUA and the banking regulators last week issued proposed guidelines on the expanding use of non-traditional mortgages, such as interest-only loans, cautioning that such products could pose inherent risks to both the lenders and the borrowers.

The regulators said they are concerned at the growing offerings of such products, especially to subprime borrowers who may not qualify for conventional mortgages or who may not fully understand the ramifications of such loans.

Among the mortgage products cited by the regulators are: interest-only loans for which the borrower is only required to pay interest for a fixed period; payment option ARMs that allow borrowers to choose from a variety of payment options; reduced documentation mortgages, commonly referred to as "low doc/no doc," "no income/no asset," "stated income," or "stated assets" or simultaneous second-line loans, which provide borrowers with a closed-end second-lien or home equity line of credit at the same time as a first lien mortgage.

The regulators urged credit unions and banks to carefully assess a borrower's ability to repay the loan before closing; to recognize that certain non-traditional mortgages have not been tested in stressed environments, such as those of major interest-rate swings, and to ensure that the borrower has sufficient information to understand loan terms and risks.

NCUA officials have been quietly expressing concerns to credit unions about such products over the past two years and say they have yet to uncover any major problems. But they want to make sure that credit unions proceed carefully with these kinds of problems.

The proposed guidance, which has been issued for public comment, can be accessed at NCUA's website at www.ncua.gov.

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