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LAS VEGAS – The NCUA issued a Letter to Credit Unions concerning increasing risks in mortgage lending resulting from consumers’ growing attraction to exotic mortgage lending products and “relaxed lender credit standards.” In its Letter No.: 05-CU-15, the agency wrote that, “Recent trends indicate a shift in consumer demand towards more exotic adjustable rate mortgage products, particularly in real estate markets that have experienced unprecedented appreciation in housing prices. In response, borrowers have resorted to these new loan options, and to relaxed lender credit standards, to be able to qualify for home financing. Many lenders offer these products ahead of standard fixed rate mortgages as a way for borrowers to increase their purchasing power. The need to use these types of products to simply qualify for a loan may increase credit risk, especially if interest rates (and the minimum payments) increase, and if the rate of home price appreciation flattens, or worse declines.” The letter lets FICUs know that NCUA field staff will be monitoring the trends and will evaluate not only interest rate risk related to mortgage lending but also the increased credit risk associated with these newer types of mortgage products and “more liberal underwriting standards.” NCUA Chairman JoAnn Johnson also addressed the issue when she spoke earlier this month at the American Credit Union Mortgage Association’s 2005 Leadership & Technology Conference in Las Vegas. She told attendees that, “We want credit unions to be at the forefront of helping their members achieve the American Dream of homeownership, and at the same time realize that as a financial partner and in empowering them toward homeowners, credit unions should do so safely and soundly.” Credit unions have $204 billion in their total mortgage portfolios. Fixed rate first mortgage loans still account for two-thirds of all CU first mortgages; the balance come from ARMs. Johnson advised credit unions should be familiar with the newer mortgage loan products and the increased level of credit risk associated with them, especially in markets with high levels of home price appreciation. -

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