New Mortgages for Financing Homes Need Uniform and Comprehensive Consumer Safeguards

CED-81-53: Published: Jul 2, 1981. Publicly Released: Jul 2, 1981.

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GAO reviewed several of the new mortgage instruments for single-family homes and their impact on homebuyers and lenders. The review was made because many Americans purchasing homes in the future will be faced with selecting one of the new alternative mortgage instruments instead of the standard level payment mortgage which has been in use for about 40 years.

The principal types of alternatives to the standard mortgage are: (1) adjustable-rate mortgages on which interest rates vary with changes in one of the money market interest rates; (2) graduated payment mortgage (GPM) wherein the initial monthly payments are less than those under the standard mortgage but rise to higher than standard levels in later years; (3) variable-rate mortgages which permit the interest rate to vary both up and down according to some money market interest rate; (4) renegotiated-rate mortgages which permit a loan to be issued for a term of 3, 4, or 5 years, secured by a long-term mortgage of up to 30 years, and automatically renewable at equal intervals; and (5) adjustable-rate mortgage loans which permit a flexible loan instrument to be issued. The Office of the Comptroller of the Currency's new adjustable-rate mortgage regulation provides that interest rate adjustments must occur at regular intervals and the maximum increase or decrease in the interest rate may not exceed 1 percent for every 6-month period between rate adjustments. GAO analysis of the Department of Housing and Urban Development's (HUD) GPM program disclosed that: (1) HUD underwriters are not routinely assessing the homebuyer's ability to meet increasing payments; (2) HUD refusal to include all GPM plans under the mortgage-backed securities program has impeded the program's growth; and (3) many homebuyers are not fully apprised of all GPM plans available.

Recommendations for Executive Action

  1. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Federal Home Loan Bank Board should determine whether borrowers should be given the option of different note maturity dates than now offered.

    Agency Affected: Federal Home Loan Bank Board

  2. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: Federal regulators should study the interest rate cap structures for the various instruments being offered and applicable risks with a view toward establishing standardized interest rate caps that provide mutual and equitable protection to both consumers and lenders.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: Federal regulators should study the interest rate cap structures for the various instruments being offered and applicable risks with a view toward establishing standardized interest rate caps that provide mutual and equitable protection to both consumers and lenders.

    Agency Affected: Federal Home Loan Bank Board

  4. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Comptroller of the Currency and the Chairman of the Federal Home Loan Bank Board should develop and administer uniform consumer safeguards in all adjustable-rate mortgage regulations. These safeguards should: (1) require that homebuyers under all adjustable-rate programs be provided a choice between a standard mortgage and the adjustable-rate mortgage being offered; and (2) provide prospective borrowers full disclosure concerning monthly mortgage payments they potentially face over the life of their mortgage commitment.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Comptroller of the Currency and the Chairman of the Federal Home Loan Bank Board should develop and administer uniform consumer safeguards in all adjustable-rate mortgage regulations. These safeguards should: (1) require that homebuyers under all adjustable-rate programs be provided a choice between a standard mortgage and the adjustable-rate mortgage being offered; and (2) provide prospective borrowers full disclosure concerning monthly mortgage payments they potentially face over the life of their mortgage commitment.

    Agency Affected: Federal Home Loan Bank Board

  6. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of HUD should: (1) provide HUD underwriters with criteria to assess future income of homebuyers applying for a section 245(a) GPM; (2) require that the Government National Mortgage Association work with securities dealers, investors, and issuers to assure partipation of section 245(a) 10-year plans in the mortgage-backed securities program; and (3) assure that homebuyers are apprised of all payment plan options available under the GPM program. One way to do this would be a certification signed by the homebuyers that they were informed of all options available.

    Agency Affected: Department of Housing and Urban Development

 

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