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U.S. Warns Lenders To Elevate Standards
| | Tuesday, May 17, 2005 @ 10:15 AM EDT
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Contributed by: Steve Gordon
Steve Gordon Properties
Read more archived articles about Credit and Finance
Federal banking regulators yesterday warned banks and other lenders to be more selective about who can get home equity loans and lines of credit because rising interest rates may make it harder for people to repay their loans.
Government officials said that while mortgage defaults remain rare, many institutions are loading up on high-risk loans.
They urged lenders to review interest-only loans, which allow borrowers to delay principal payments for years, and "no-doc" loans, which don't require documenting borrowers' assets and income. They also suggested that lenders that refuse to do so may find themselves facing heightened federal oversight.
For consumers, it could become tougher to get some kinds of home equity loans, such as those that amount to 100 percent of a home's value. "It may curtail the appetite of some lenders for taking risks and if it does, it would reduce the credit supply to some consumer groups," said Douglas G. Duncan, chief economist for the Mortgage Bankers Association.
"I think this is a policy that's long overdue," said John H. Vogel Jr., a professor of real estate at Tuck School of Business at Dartmouth University. "We've built an entire housing finance structure based on the belief that housing will always keep going up, and people are using home equity loans with the assumption they can always repay them when they sell their houses at an increased value."
The regulators' warning came in what is called a "guidance" to the lending institutions, issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration. They told the lenders they regulate that the institutions' "credit risk management practices have not kept pace with the products' rapid growth and easing of underwriting standards."
The regulators urged banks, thrifts and credit unions to use particular caution in making loans originated by mortgage brokers, who are not bank employees and who are paid by commission based on the volume of loans they complete.
http://www.washingtonpost.com/wp-dyn/content/article/2005/05/16/AR2005051601555.html
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