LOS ANGELES Comptroller of
the Currency John C. Dugan told a community development conference today that
new types of mortgages aimed at making homes more affordable may offer low monthly
payments initially, but will lead to significantly higher payments later.
After the limited initial
period ends, the monthly payment for the holder of a nontraditional mortgage must
increase even if interest rates stay flat and the size of that increase can
be very substantial, Mr. Dugan said in a speech to the Greenlining Coalitions
annual economic summit. At its core,
the bargain in a nontraditional mortgage is that the borrower pays a lower
monthly payment now in exchange for the near certainty of a higher monthly
payment later.
That potential for payment
shock got the attention of the regulatory agencies and led to the proposed
guidance that is now under consideration, he said. The guidance addresses fundamental issues involving nontraditional
mortgages, including the prospect of substantial increases in monthly payments
that borrowers may not be able to afford and may not understand. The increased
monthly payments could put their homes at risk and lead to losses for lenders.
In the case of one such
mortgage, the payment option ARM, homeowners with typically structured and
priced loans could see their monthly payment double at the end of the initial
period, which is usually about five years.
Do borrowers that buy these products really understand the very
real possibility of dramatically increased payments in the future? Mr. Dugan
asked.
The agencies looked at
marketing materials used by lenders who offer non-traditional mortgages and
found that the materials focused mainly on the initial low monthly payment,
while giving relatively little attention to the likelihood of much higher
payments later.
Going through this exercise
led regulators to conclude, at least initially, that nontraditional mortgages
are relatively complex and that borrowers unfamiliar with them which means
most borrowers would benefit greatly from improvements in both the content
and timing of disclosures, he added.
Mr. Dugan said the agencies
have by no means proposed a wholesale clamp-down on the use of these
nontraditional products.
Our proposed guidance makes
clear that these products are perfectly appropriate if underwritten properly
with meaningful disclosures, he said.
Now that the comment period has closed, the agencies will be carefully
reviewing comments over the coming days to determine whether adjustments to the
proposal are called for, he added.
In his speech, the Comptroller
highlighted today the importance of homeownership in America and applauded
community-based organizations for partnering with banks in efforts to help
low-income families buy and retain homes.
Homeownership, he said, is synonymous with building healthier
communities and stronger economies.
Increased homeownership means
better school systems, reduced crime rates, and more civic-mindedness and, of
course, stronger and more stable banks, he said.
Homeownership is also being
helped by the community-based organizations around the country, including Los
Angeles Neighborhood Housing Services, that work with local lenders to minimize
the number of delinquent mortgages to go to foreclosure. This is work that is every bit as important
as helping people become homeowners in the first place, he said.
With their deep-rooted
community connections, these organizations can serve as trusted intermediaries,
working with borrowers who might not be as comfortable turning to a bank for
help when they get into trouble, he said.
Were also seeing evidence that banks can achieve cost savings by
partnering with non-profits in this way.
Mr. Dugan also said that
borrowers who are not able to qualify for prime rate loans deserve assurance that they will be treated fairly
and will not be victimized by unfair or deceptive lending practices.
The OCC has acted to guard
against such potential abuses, he said.
While we have not seen evidence of predatory lending by national banks,
we are taking preventive action to ensure that such lending does not
occur. We are the only bank regulatory
agency that has lending regulations specifically prohibiting unfair and
deceptive practices in the mortgage lending process, and we have issued
extensive mortgage lending guidelines to guard against predatory and abusive
lending practices such as loan flipping and equity stripping.
Mr. Dugan said the OCC
carefully monitors national banks through comprehensive examinations, and we
are prepared take strong enforcement actions if they encounter evidence of
predatory lending.
Mr. Dugan said that OCC
District community affairs officers are working with national banks to help
identify lending, investment, and service opportunities that can increase
access to financial products and services for minorities.
Introducing Susan Howard, the
OCC's community affairs officer for California, to the audience, Mr. Dugan
said, I am proud that Susan, like all of our community development
professionals, strives to build the kinds of partnerships among banks and
housing counseling agencies that can make homeownership more accessible,
affordable and sustainable for more people.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.