Regulators Tighten Requirements on Exotic Florida Home Loans

As the housing market has slowed down, many lenders have been pushing exotic Florida home loans on hopeful buyers. This creative form of financing can be dangerous, however, and federal banking regulators are doing something about it.

They published new guidelines today for banks to follow when originating and underwriting such nontradtional national and Florida home mortgages, those that carry potential payment shock for borrowers.

The problem with exotic Florida home mortgage loans

Many in the loan industry cite these mortgages as major contributors to the nation’s home-ownership boom because they’ve enabled numerous borrowers to purchase in high-priced markets where traditional mortgages were out of reach. But they’ve also led to defaults and foreclosuers when Florida mortgage rates were reset.

The new guidelines retain disclosure and underwriting provisions that some banks had objected to as too restrictive, including a requirement that lenders qualify borrowers at the fully indexed rate for interest-only and payment-option loans.

These updated guidelines will require lenders to analyze a borrower’s ability to repay not only the initial loan amount, but also any additional principal that may accrue in the case of a payment-option loan with negative amortization.

Testifying before members of the Senate Banking Committee last week, Kathryn E. Dick, deputy comptroller of the Office of the Comptroller of the Currency, said:

“Underwriting standards that do not include a credible analysis of a borrower’s capacity to repay their entire debt violate a fundamental principle of sound lending and elevate risks to both the lender and the borrower.”

Consequences for Florida home loan applicants

As a result of these changes, fewer borrowers will qualify for nontraditional loans that many in the banking and real estate industry say have helped buyers purchase homes they would not have been able to afford using a traditional Florida home mortgage.

Some borrowers may also be scared away by new disclosure requirements that spell out how monthly payments will increase if borrowers choose to make minimum payments or if interest rates adjust. Dick said last week that the new guidelines will allow “no equivocation about the risks of negative amortization and payment shock, if that’s what the product entails.”

This should be good news. While it may take you longer to quality, it means those that are approved for a Florida home loan are in less danger of defaulting on it. Submit our FREE online form now to see where you stand.