Banks want new rules to exclude 'hybrid' loans

From Bloomberg News

Banking industry representatives urged regulators Wednesday not to expand recent guidelines on risky mortgages to include a type of sub-prime loan that has become increasingly popular in recent years.

A coalition of nine banking and housing groups, including the American Bankers Assn., asked six federal and state bank regulators to abandon the idea of adding so-called hybrid adjustable-rate mortgages, or hybrid ARMs, to guidelines they put forward in September.

"Reducing the availability of these products by precipitously imposing new underwriting requirements risks denying many borrowers the opportunity for homeownership or needed credit options," the groups wrote in a letter to the regulators.

Those mortgages, which represent about a quarter of the mortgage market, have been criticized by consumer groups for offering a "teaser" fixed interest rate that rises after an introductory period, resulting in "payment shock" to borrowers.

Lawmakers and consumer groups have called on regulators to incorporate the mortgages in the guidelines, which banks use to set underwriting and disclosure standards. The guidelines currently apply to interest-only and payment-option adjustable- rate loans.

"All of the concerns that were raised about interest-only and payment-option ARMs exist with these hybrid ARMs," said Jamie Goodson, senior policy counsel at the Center for Responsible Lending in Washington. "By the agencies' own standards, these products are risky and should be prudently underwritten."

The industry groups' letter was sent to the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors.

In a Dec. 7 letter to regulators, six members of the Senate Banking Committee, including incoming Chairman Christopher J. Dodd (D-Conn.), asked that the hybrid mortgages be included because they "have a number of the same risky attributes" as the mortgages already covered by the guidelines.

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