Warning on Adjustable Rate Mortgages from the Feds

This is from the Financial Times:

Fed chief tells banks to be vigilant on home loans

Ben Bernanke, the chairman of the Federal Reserve, on Thursday called on banks to exercise extra vigilance in their mortgage lending, while expressing confidence that the US housing market was cooling in an “orderly and moderate fashion”.

Mr Bernanke said lenders needed to be careful when providing “non-traditional” mortgages such as interest-only loans and option adjustable-rate mortgages, which accounted for 30-40 per cent of approvals last year.

He said the Fed expected to release guidelines for non-traditional mortgage lending in due course. This guidance could result in a tightening of bank lending procedures that would further cool the housing market.

“We do have some concerns about the non-traditional mortgage lending,” he told a conference hosted by the Chicago Federal Reserve yesterday. “We are not saying that you shouldn’t make those loans; we are saying you need to make them the right way.”

The US central bank put forward proposed new guidelines in December and is discussing industry feedback with other US housing regulators.

The Fed wants to make sure that banks are underwriting non-traditional loans correctly and that their customers understand the risk that payments on such mortgages could jump under certain circumstances.

Fed officials believe this is particularly important because banks are now marketing non-traditional loans to lower-income homebuyers.

Mr Bernanke’s comments echo remarks by his predecessor Alan Greenspan, who told Congress last year: “The apparent froth in the housing markets may have spilled over into mortgage markets.”

Average US house prices have been rising at double-digit percentage rates for most of the past decade, fuelled in part by innovations in mortgage lending that have improved affordability.

The chairman’s comments about “a very orderly and moderate cooling” in the housing market will provide some reassurance to homeowners and reflect recent comments from housebuilders, who expect a soft landing, similar to the corrections seen in 1994-95 and in 2001.

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