WASHINGTON — Credit unions and other mortgage lenders are well aware of the increased popularity over the past few years of alternative mortgage products as a way of making purchasing homes more affordable, but that increased usage has come with risks.
In testimony before the Senate, the Government Accounting Office shared the findings of its report that included strong recommendations to improve the clarity and comprehensiveness of AMP disclosures and the inherent risks of the product to consumers who may not fully understand the information they're given by some lenders.
According to the GAO, AMP borrowers historically consisted of "wealthy and financially sophisticated borrowers" who used AMPs as financial management tools. More recently, though, a wider range of borrowers have been using AMPs as affordability products to purchase homes that otherwise could be unaffordable to them using conventional fixed-rate mortgages.
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"Unless the mortgages are refinanced or the properties sold, AMPs eventually reach points when interest-only and deferred payment periods end and higher, fully amortizing payments begin. Regulators and consumer advocates have expressed concern that some borrowers might not be able to afford these higher monthly payments."
From 2003-2005, the GAO said AMP originations made up of mostly interest-only and payment-option adjustable-rate mortgages, increased from less than 10% of residential mortgage originations to about 30%. AMP lending has been concentrated in the higher-priced regional markets on the East and West Coasts in states such as California, Washington, Virginia and Maryland.
The GAO is recommending that as the Federal Reserve Board reviews Regulation Z, it consider improving the clarity and comprehensiveness of mortgage disclosure by requiring language that explains key features and potential risks specific to AMPs.
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