The Federal Reserve said Tuesday that interest-only and other nontraditional mortgages threaten the financial system, and it urged the nation’s banks to tighten lending standards.
“The agencies are concerned that these practices can pre sent unique risks that institutions must appropriately manage,” the Fed said in a statement with other bank regulators. “They are also concerned that these products and practices are being offered to a wider spectrum of borrowers.”
Interest-only home loans accounted for 23 percent of all U.S. mortgages from January through June, up from 17 percent a year earlier, according to the Mortgage Bankers Association.
Countrywide Financial Corp., the biggest U.S. mortgage lender, said in October that it made $27 billion in interest-only loans during the third quarter, an increase of 50 percent over a year earlier.
Lenders are offering more so-called hybrid mortgages, feeding demand from buyers who barely qualify to purchase homes at prices inflated by a real-estate boom. An interest- only mortgage allows the borrower to defer principal payments to a later date, reducing the monthly cost of carrying the loan.
“Some tightening of underwriting standards, some moral suasion from the Fed would be nice, and in fact, we’re seeing some of that,” Paul McCulley, a managing director and fund manager at Pacific Investment Management Co., said in an interview Tuesday from Newport Beach, Calif.
A slump in housing-price gains may lead to losses for borrowers and lenders, Fed Chairman Alan Greenspan said in a speech to the American Bankers Association in September.
“In the event of a widespread cooling in house prices, these borrowers, and the institutions that service them, could be exposed to significant losses,” Greenspan said.
