Toomre Capital Markets LLC

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Controller of Currency Dugan Warns on Negative Amortization Mortgages

Campion Walsh writes on Dow Jones Newswires on December 1, 2005 in a story entitled “U.S. Comptroller Warns About Exotic Mortgage Types” that Comptroller of the Currency John Dugan said Thursday he has grown increasingly concerned by risks to both borrowers and lenders from relatively exotic negative-amortization and payment-option mortgages. Regulatory guidance on mortgage lending, now in the works by the Office of the Comptroller of the Currency and other bank supervisors, will give a focus to negative-amortization mortgages and payment-option adjustable rate mortgages, or ARMs, considering the "payment shock" these loans can carry for unwitting borrowers, Mr. Dugan said.

With interest rates rising and the end of the initial low-two year payment period coming for many of the recently originated option mortgage products, Toomre Capital Markets has likewise been very concerned about the “payment shock” that the primary mortgage obligors will experience. Since so many of these types of loans have been securitized or sold in one form or another to the capital markets, such payment shock is also likely to ripple through both the mortgage-backed securities (“MBS”) and collateralized debt obligation (“CDO”) market sectors. TCM has previously written about this mortgage credit risk problem here.