New Mortgages for Financing Homes Need Uniform and Comprehensive Consumer Safeguards

Gao ID: CED-81-53 July 2, 1981

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.


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