Federal directive targets risky mortgage practices

Third of three parts

Federal banking agencies, concerned about the potential for abuses in mortgage lending, are going after the worst practices in the industry.

A directive last month from the Federal Reserve and four other federal agencies targets the proliferation of loans offering interest-only payments for extended periods and adjustable-rate mortgages that offer the option of paying interest only, making a minimum payment each month or adding in principal. That includes about half of all mortgages made last year.

Regulators say they are particularly concerned that some loans not only do not pay down principal, like a traditional mortgage, but they also increase the amount of principal that a consumer must pay by as much as 100 percent through “negative amortization.”

The regulators also expressed concern about the growing practice of “layering” risky mortgages on top of already dicey lending practices, such as requiring no down payment or proof of income from borrowers.

The regulators said banks that offer such loans will be held accountable for making full disclosure of the risks to consumers.

But many inside and outside the mortgage industry question how much impact the banking directive will have, because so many mortgage brokers operate outside the banking system. Only those that are subsidiaries of banks would seem to be affected.

“Banking regulators actually have fairly minimal control or even influence over a huge portion of our economy,” said Christopher Cruise, a Washington mortgage broker and trainer for the Mortgage Training Institute.

“I’m not saying we’re thumbing our nose at the regulators,” he said. But “if I’m a street-level originator licensed by the state of Maryland generating 20,000 loans in a year, and I find rich investors to buy them, nothing the [Office of the Comptroller of the Currency] says has any impact on me.”

Mortgage companies such as Countrywide, the biggest nonbank lender in the country, appear to be unaffected, he said.

“I think they own a bank, I don’t think the bank owns them. They sell their mortgages to Wall Street,” he said.

‘Empire of debt’

Although mortgage brokers perceive few limits on current practices, many nevertheless are concerned about the massive debts they see borrowers take on to buy houses and maintain affluent lifestyles.

Mortgage brokers in California report that some borrowers in recent years have been making a living by taking advantage of soaring housing prices and “flipping” real-estate investments — buying and selling them in rapid succession — while using equity loans on the properties as “income.”

The practice could amount to mortgage fraud if the borrowers disguised the source of their “income” on their loan applications, the brokers said.

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