U.S. bank regulators eye new mortgage guidance

By Patrick Rucker

WASHINGTON (Reuters) - U.S. bank regulators are mulling whether to expand the list of mortgage products that might lead many borrowers into financial distress, the chiefs of two regulatory agencies said on Wednesday.

A new directive, if adopted, would affect popular loans that carry low introductory rates and are made to subprime borrowers, who have less-than-stellar credit histories.

"We are under very active discussions with that and I'm hoping we'll have something out for comment very soon," said Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., speaking at the Reuters Regulation Summit in Washington.

John Dugan, the Comptroller of the Currency, said regulators are likely to "end up doing something" by the middle of the year.

"I don't know what form (the guidance) will take yet," Dugan said at the summit, but regulators will give the lending industry ample time to comment.

A spokesman for the Office of Thrift Supervision said it is "looking at the issue" with the other lending regulators.

In September, federal bank regulators issued guidelines on how to underwrite and explain "exotic" mortgages that helped fuel the recent housing boom.

Pay-option and interest-only loans are among products that give borrowers some freedom to lower early payments, and delay larger payment hits.

In December, six Democratic and Republican members of the Senate Banking Committee signed a letter asking regulators to expand the guidelines to include certain mortgages made to subprime borrowers.

One Adjustable-Rate Mortgage, known as a 2-28 ARM, allows a borrower to make low payments for the first two years of a 30-year mortgage.

All mortgages should be affordable over the life of the loan, the senators wrote, and the 2-28 ARM mortgages "do not pass this test."

Several trade groups have since warned that regulators not unduly crimp ARM lenders that make loans that, in practice, are safe for borrowers.

Regulators said their focus is loans to high-risk borrowers.

Dugan said regulators "need to be careful about not overreaching."

And Bair said "we don't want to bring in all ARMs," but that "it is just in the subprime area that we're thinking about."

New guidance might involve an updating of existing guidance on subprime lending, or a "build-out" of recent rules on nontraditional mortgages, Bair said. "(We) want to do this sooner rather than later," she said.