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Lending Update: Creativity Is Getting More Regulation, Less Options To ARM

We are all know that government has the reputation (fairly or unfairly) of being to be averse to creative solutions. In Kenneth Harney’s column Regulators say creative loans are too risky [Detroit Free Press] [1] he talks about the looming regulations designed to protect the consumer.

Creative financing has been one of the key economic drivers of the housing market during the latest boom, getting people into the market when in prior booms, they would not have qualified.

An important debate is raging inside the home mortgage >market, though beyond the earshot of most consumers.

The issue: popular payment-option, interest-only and piggyback >loans, and the financial risks they pose to homebuyers and >lenders.

On one hand, federal financial regulators say the risks are too significant to ignore, so lenders need to take special care in evaluating and approving customers who apply for these mortgages.

The regulators want to impose new creditworthiness restrictions and disclosure requirements forcing lenders to be certain borrowers understand the potential dangers.

The problem arises when consumers do not fully understand the products they are signing up for when rates are higher when their mortgage resets. Of course, lenders see no problem with these programs because they say they inform the consumers and it helps get buyers into their new houses and do not want to discourage consumers from applyhing for mortgages. Lenders are already facing lower loan volume as rates creep upward.

Consumers have grown accustomed to using their house as an ATM [MoneyWeek] [2] so its a partnership made in heaven for both.

The regulators are really moving forward because the people on the fringe, who got caught up in the excitement of the housing market may not have listened to or received good advice. To most consumers, however, restrictions on these products probably won’t provide that big of an impact. To lenders, I suspect there’s going to be a whole lot more paperwork to fill out in the future.