Federal Regulators Offer Guidance on Nontraditional Florida Home Loans

As 2005 came to a close, the Office of the Comptroller, along with other federal regulators, authored “Interagency Guidance on Nontraditional Mortgage Products,” a rule proposal meant to assist those considering exotic Florida home loans and other mortgages. The public comment period on such advice ended on March 29 - but the comments are still available online here.

These monetary regulators aren’t out to end nontraditional mortgages. They simply wish to make sure the loans are effective, replete with terms that are fully disclosed to borrowers trying to choose the right Florida mortgage loan.

Determining creative Florida home loan guidance

Since the end of March, federal agencies have been sorting through comments on their proposed guidelines to reduce risk levels associated with some markets’ preponderance of popular interest-only, payment-option, piggy-back, no-, low-down payment and certain adjustable rate mortgages, all classified as “nontraditional” or “exotic” loans.

“What our proposed guidance seeks to do is to ensure that all nontraditional mortgage products are properly underwritten and disclosed. We believe this will help promote sound and sane practices in the mortgage market and thus serve the interests of the banking system and the general public,” said Comptroller of the Currency John C. Dugan.

In some housing markets, especially high-cost and fast-appreciating markets such as many in Florida, the traditional 20-percent-down, fixed-rate, 30-year mortgage just doesn’t cut it.

Nontraditional Florida home loans have grown in popularity because they give buyers more financial leverage. The loans have also been used to help historically under served socioeconomic and ethnic segments of the population buy homes.

The problem with these Florida home loans

The trouble, according to federal money market regulators, is the loans can push border line borrowers over the edge. In today’s market, rising Florida home loan rates and flattening home prices exacerbate financial weakness and compound a household’s financial woes.

“What happens if rates rise, or house prices fall, or both occur?” Dugan asked. “A borrower could easily be stuck with a mortgage that exceeds the value of his or her home, making it very difficult to refinance or sell the home.”

Home owners with properties worth less than their mortgage are more likely to walk when the going gets tough. If Florida home loan lenders write too many risky loans, they could be left on the hook … which could have a snowballing effect on the cost of Florida home loans in generaland.
The proposed federal guidelines suggest, in part, that lenders:

• Take stock of borrowers’ ability to repay the Florida home mortgage loan, including any balances added through negative amortization, at the fully indexed rate that would apply, not only initially, but also after the introductory period.

• Recognize that certain nontraditional mortgage loans are untested in a stressed environment and warrant strong risk management standards as well as appropriate capital and loan loss reserves.

• Ensure that borrowers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice. This should help avoid future delinquencies.

“Knowing when to intervene in business of the banking system — and to what degree — will always demand the exercise of subjective judgment,” Mr. Dugan said.

The bottom line? Consider all questions and all angles of a Florida home loan before agreeing on its terms. These exotic options may very well pay off as long as you understand them fully.