Lenders Ask Regulators to Ease Bad Credit Mortgage Restrictions

Several U.S. lending trade groups asked mortgage regulators to resist tightening guidelines on the low introductory-rate loans that helped fuel the recent housing boom, Reuters reports.

The joint letter expresses strong concern that the rules on such loans, dubbed “non-traditional” or sometimes “bad credit mortgages” could be expanded.

In late September, federal banking regulators released guidance for how lenders should go about explaining and underwriting mortgages that often begin with low payments.

Early this month, several members of the U.S. Senate Banking Committee asked regulators to include one specific type of home mortgage loan made to high-risk borrowers in its recent guidance.

The adjustable rate mortgage, known as a 2-28 ARM, allows the borrower to make low payments in the early years of the mortgage but those payments can spike later in the life of the loan.

All mortgages should be affordable over the life of the loan, the senators wrote, and the 2-28 ARM mortgages “do not pass this test.” They believe only the temporary buydown can be called affordable.

In its letter Wednesday, the lending industry said the senators’ suggestion “would dramatically expand” the rules on non-traditional guidance and “risks denying many borrowers the opportunity for home ownership.”

Moreover, the letter argues, regulators should not change the meaning of existing guidance without giving the industry time to consider the change and make its own suggestions.

The letter from senators was signed by Christopher Dodd, the incoming Democratic chairman of the U.S. Senate Banking Committee, as well as several other Democrats and two Republicans.

Wednesday’s letter was signed by nine lending trade groups including the American Bankers Association, the Mortgage Bankers Association and America’s Community Bankers.