Fed Governor Urges Tighter Bank Controls

Federal Reserve Gov. Susan Bies urged mortgage lenders to tighten credit standards for nontraditional products such as interest-only loans, saying borrowers who have “payment shock” as rates rise may default on their loans.

“The recent easing of traditional underwriting controls and the sale of nontraditional products to sub-prime borrowers may contribute to losses on these products,” Bies said at a Mortgage Bankers Assn. conference in Half Moon Bay, Calif.

Bies said bank supervisors were concerned that the slowdown in mortgage demand resulting from rising interest rates was causing the erosion of credit quality.