NCUA and the other federal regulators issued this guidance to address risks posed by residential mortgage products that allow borrowers to defer repayment of principal and sometimes interest.
Such products as “nontraditional,” “alternative,” “exotic,” or “nontraditional” mortgage loans include “interest-only” and “payment option” adjustable-rate features. These products allow borrowers to exchange lower payments during an initial period for higher payments later.
The regulators are concerned that some borrowers may not fully understand the risks of these products. While many of these features exist in other adjustable-rate mortgage products, the regulators’ concern is elevated with nontraditional products because of the lack of principal amortization and the potential for negative amortization. In addition, institutions are increasingly combining these loans with features that may compound risk (“risk layering”).