Nontraditional mortgages attract more Federal and state regulation

In a  report released today, Dominion Bond Rating Service said that the number of state regulators willing to promote guidelines that address the risks associated with the origination of nontraditional mortgage loans is continuing to increase.

Since the recent issuance of the Guidance on Nontraditional Mortgage Product Risks (CSBS-AARMR Guidance), a total of 19 states and the District of Columbia have adopted it or endorsed it. DBRS thinks that acceptance of the CSBS-AARMR Guidance by other states will is going to go on in 2007. This is particularly relevant if adopted by the large coastal states, since affordability and nontraditional mortgage products are teeming in these areas, DBRS analysts said.

The rating agency explained that the adoption of the CSBS-AARMR Guidance by a state can happen either via the state legislative process or through its state banking departments. For instance, DBRS stated that in certain states, such as California and Nevada , legislatures must ratify state banking regulations. However, in other states, such as Georgia and Kentucky , state banking departments carry regulative autonomy and can adopt and enforce regulations. Considering the two different approaches, variations in state regulations for nontraditional mortgages could emerge and potentially impact the consistency of underwriting standards for nontraditional mortgage products, DBRS said.

Aside from regulatory developments at the state level, the Office of Federal Housing Enterprise Oversight on Dec. 13 instructed Freddie Mac and Fannie Mae to adopt precepts of the Interagency Guidance. As GSEs, Fannie Mae and the Freddie Mac buy mortgage loans in the secondary market to increase housing affordability and accessibility for American families. OFHEO's directive requires both agencies to consider how originators underwrite certain mortgages that they buy. Aside from this, OFHEO instructed Fannie Mae and Freddie Mac to report on the steps they have taken to ensure that internal risk policies are consistent with Interagency Guidance principles. As the biggest mortgage investors in the U.S., any change in practices by Fannie Mae or Freddie Mac will inevitably have ramifications for the broader market, DBRS said.