Federal regulators instructed the banking industry to explain the risks posed to borrowers from non-traditional mortgage loans such as interest-only mortgages and said they would use the guidance in auditing banks’ operating procedures. The new guidelines came as regulators increasingly fear the potential impact from these mortgages both on consumers and on the banks that make the loans. The Mortgage Bankers Association responded with criticism of the move, noting that delinquency rates are “within the range of historical norms” and expressed concern that the guidelines would unfairly limit choices by bankers and consumers. Non-traditional mortgages, such as interest only loans that allow borrowers to pay only the interest due on the mortgage for a specified period of time, grew to represent 30 percent of all mortgage lending in 2005, up from 10 percent in 2003, according to the Government Accountability Office. The loans became gradually more popular as home prices rose over the past few years, but are riskier than traditional mortgages because the loan balances could exceed the value of the home if home prices drop precipitously and because rising interest rates could bring payments to levels that borrowers can no longer afford.
