Washington Report: Risky Loans, Terrorism Insurance, and Hurricane Recovery

February 1, 2006

Balance key with risky loans

Proposed federal guidelines released at the end of 2005 on nontraditional mortgage products should be helpful in protecting consumers who are unfamiliar with the mortgages’ risks, but it’s important the guidelines don’t go too far and reduce availability of the mortgages for buyers who need them, NAR says.

The guidelines direct lenders to assess borrowers’ ability to repay a loan not just during the introductory period, when rates are at their lowest, but later in the loan term when the rate is fully indexed and fully amortizing. Lenders should also be sure borrowers can repay loans when any balances added through negative amortization are included.

The use of nontraditional mortgages, such as interest-only and payment-option adjustable-rate mortgages, has grown in recent years, with lenders increasingly offering them to subprime and other borrowers who have trouble accessing conventional financing. NAR, long an advocate for the careful use of risky mortgages, recently teamed with the Center for Responsible Lending to produce a consumer brochure, “Specialty Mortgages: Shopping for a Mortgage? Do Your Homework First”.

In its comments to the proposed guidelines, NAR will stress the need to keep nontraditional mortgages available to appropriate borrowers, particularly in high-cost areas.

The proposed guidelines were issued by the Federal Reserve Board, Federal Deposit Insurance Corp., National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision. To view the guidelines and see a PDF version of NAR’s consumer protection brochure, click here.

Terrorism insurance extended

President George W. Bush has signed into law a two-year extension of federal terrorism insurance, a program put into place after Sept. 11, 2001, to help ensure the availability of reasonably priced policies for property owners. NAR supports the extension, saying the federal role is vital for keeping financing flowing to commercial real estate.

Under the new rules, however, property and casualty losses would have to be higher than previously to trigger federal involvement. Industry deductibles would increase as well.

The threshold for losses to trigger payouts—at $5 million under the existing program—would be bumped up to $50 million this year and to $100 million next year; the amount the insurance industry is required to pay in a year would be increased to $25 billion in 2006 and $27.5 billion in 2007, up from $15 billion currently.

Hurricane recovery clears hurdle

Efforts to spur Gulf Coast rebuilding through an independent development entity moved forward with passage of legislation by the U.S. House Financial Services Committee to create the Louisiana Recovery Corp.

LRC would relieve hurricane victims of up to $500,000 in their mortgage obligation if they transfer title to the agency. Acquisitions would be funded using proceeds from Treasury bond issues.

The corporation would make infrastructure repairs before selling its acquisitions to private developers through a competitive bidding process. The bill, H.R. 4100, grants property owners the right to opt out of participation in the program and denies the corporation eminent domain power. There’s no equivalent bill in the Senate.

NAR supports quick action to rebuild stricken areas and is looking at the legislation carefully, association analysts say.

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