Washington Mortgage Lenders Warn of Payment Increases

The state Department of Financial Institutions has fired a warning shot at mortgage brokers, issuing new guidelines intended to rein in risky subprime loans.

The DFI’s new “statement of regulatory guidance standards” directs mortgage brokers and other loan companies to better evaluate a borrower’s ability to make the loan payments on bad credit home loans.

The goal: hold Washington mortgage brokers accountable when they help borrowers take out loans they ultimately can’t afford.

“You can’t change the industry in a week,” said Deborah Bortner, the department’s consumer services director, “but we’re trying to send a message that we’re serious about this.”

Nationwide, the housing market continues to be roiled by the subprime mortgage meltdown, with some states seeing record numbers of homeowners default on their .

While Washington’s strong housing sector has largely insulated the state against such problems, Bortner said brokers can do a much better job of educating customers.

The new guidelines essentially direct mortgage brokers to tell customers that future payment spikes are built into many subprime products, and that exotic mortgages often carry higher interest rates.

“The subprime market problems and the foreclosures that are happening now is a very good indication that people were not told how much their payments would be or could be,” Bortner said.

For now, firms face few repercussions if they don’t follow the new suggestions. According to Bortner, the department can’t directly penalize firms for not following the suggestions, although it does have broad statutory authority to act against companies that mislead borrowers or treat them unfairly.

That situation could change, as Bortner said the guidelines are the first step in a months-long process that will result in firmer rules.

Adam Stein, president of Auburn-based American Brokerage and of the Washington Association of Mortgage Brokers, said it was too early for him or the association to form a firm opinion about the DFI statement.

In general, Stein said the association supports any measures that could help introduce “greater transparency in the loan process.”

However, Stein worried that regulations could end up limiting access to bad credit home loan products too severely.

In areas such as the Seattle housing market, the spread between the average income and the average home price is so wide that creative financing tools “are the only way for many people to afford a home,” Stein said.

“I would hate to see that dry up.”