Regulators Warn Lenders Of Risk Layering At NCUA Summit
Federal Reserve Governor Susan Bies told attendees of NCUA's Risk Mitigation Summit that regulatory supervisors have noticed that lenders are increasingly combining non-traditional mortgage loans with risk layering practices, such as by not evaluating a borrower's ability to repay the loan.
"We are also seeing more frequent use of limited or no documentation in evaluating an applicant's income and assets," said Bies, warning that the increasing easing on credit requirements, combined with non-traditional loan products, especially to subprime borrowers, "may generate losses on these products greater than has been observed in the past."
In addition, increasing numbers of borrowers are buying property with no equity down payment by using simultaneous second liens, said the Fed Governor.
"The greater prevalence of risk-layering practices and sales of non-traditional mortgage products to non-prime borrowers have occurred in the past few years as competition for borrowers and declining profit margins has prompted lenders to loosen their credit standards to maintain loan volume in a slowing environment," said Bies.
Bies called on credit unions and other lenders to make sure the complexity of these new mortgage products is clearly understood by both the lenders and the borrowers.
Other speakers emphasized the need for credit unions to adopt a balanced approach to risk mitigation, no matter how large or small the institutions.
Leo Tillman, a senior managing director with Bear Stearns, insisted that even the smallest credit union should be engaged in evaluating and managing the risks.
Owen Cole, director of NCUA's Office of Capital Markets and Planning, said that risk mitigation strategies are especially important for those credit unions that choose to hold fixed-rate mortgages in their portfolios, as well as non-traditional mortgages.
"Credit unions should be measuring market and liquidity risk for those non-traditional products," said Cole.
He suggested steps like securitizing mortgages with government-sponsored enterprises or with private investors; or hedging their risks with derivatives. In addition to mitigating risk, this can free up more assets that credit unions can use for additional lending or other purposes, he said.
Other speakers included, Emily Hollis, president of ALM First Financial Advisors; Henry Norwood, senior vice president of QRM; Mathew Slaughter, a member of the President's Council of Economic Advisors; Robert Burrell, chief investment officer for WesCorp FCU; Dennis DeGroodt, president Missouri Corporate CU; Larry Harmon, chief risk officer, Members United Corporate FCU; Blaine Frantz, an analyst with Moody's Investment Services; Robert Couch, president of Ginnie Mae; Geoff Bacino, member of the Federal Housing Finance Board and former NCUA Board member; and NCUA Vice Chairman Rodney Hood, who organized the event.