After hinting about new rules for months, on Dec. 27 federal banking regulators issued proposed guidance about nontraditional mortgages to lenders. The suggested rules—which won't go into effect until a 60-day comment period closes on Feb. 27 and an internal review of comments is made—advise more-stringent lending guidelines for interest-only and so-called payment option mortgages, which allow homeowners to choose monthly payments that result in negative amortization.

The proposed guidance comes as the popularity of nontraditional mortgages has skyrocketed. According to Loan-Performance, a subsidiary of First American Real Estate Solutions, interest-only loans accounted for just 1.9 percent of mortgage originations in 2000; through September 2005, that figure had climbed to 30.6 percent.

In a late October speech, John Dugan, the U.S. comptroller of the currency, described his concerns about growing risk in residential real estate and cautioned that such nontraditional products as payment option loans “have a legitimate use in the right hands, but they need to be handled with extreme care.”

ON THE WAY DOWN?: Total starts in December were down 13.2% from their peak in February, but early figures show that 2005 was another record year for starts. SOURCE: U.S. CENSUS BUREAU

The proposed guidance, issued jointly by his agency, the Office of Thrift Supervision, the Federal Reserve, the Federal Deposit Insurance Corp., and the National Credit Union Administration, details that extreme care. Among other things, it recommends that concentration limits be set for types of loans, to maintain diversification; that lenders perform stress tests on factors outside their control to better manage risk and that they underwrite mortgages based on buyers' income as well as credit scores; and that consumers are appropriately alerted to the risks associated with the loans.

“The agencies will carefully scrutinize institutions' lending programs, including policies and procedures, and risk management processes in this area,” the guidance states. “Remedial action will be requested from institutions that do not adequately measure, monitor, and control risk exposures in loan portfolios.”

Banking association groups including America's Community Bankers and the Mortgage Bankers' Association welcome the comment period. “I think it was a very conscientious attempt on the part of the regulators that they're offering guidance that helps clarify the market without disrupting the market,” says Tim Doyle, senior director of the Mortgage Bankers' government affairs group. “It sends a message that they're concerned about doing it right.”

HOLD UP: Both long- and short-term mortgage rates paused in January. Fixed 30-year rates even fell a bit. Economists forecast only a slight rise in fixed rates through 2006. SOURCE: FREDDIE MAC

Consumer PollHOME SICK:Consumers were feeling more upbeat in December, encouraged by some lower energy prices. But only 60 percent of respondents said it's a good time to buy a house. SOURCE: UNIVERSITY OF MICHIGAN SURVEYS OF CONSUMERS

Regional StartsBRIGHT SPOT: The South continues to be the strongest region for starts, up 8.2 percent year over year. The Northeast, Midwest, and West posted double-digit declines. SOURCE: U.S. CENSUS BUREAU

Median Sales PricePRICING POWER: By November, new-home prices settled close to their levels of a year earlier. Existing-home prices jumped $25,000 in a year. SOURCES: NATIONAL ASSOCIATION OF REALTORS AND U.S. CENSUS BUREAU

New-Home SalesFALL BACK: November's new-home sales paled compared with October's buying spree, but they remained a healthy 6 percent ahead of November 2004, on their way to another record. SOURCE: U.S. CENSUS BUREAU

Building PermitsSLOWER PACE: Permits fell slightly compared with both a month and a year earlier, but it appears that another year ended with more than 2 million permits pulled. SOURCE: U.S. CENSUS BUREAU

Housing Market IndexGOING STEADY: The index of builder sentiment stayed even in January, thanks to a drop in long-term mortgage rates and stronger consumer confidence. SOURCE: NAHB

Lumber PricesVANISHING VOLATILITY?: Prices for framing lumber and structural panels moved only slightly in the last months of 2005 and into January. SOURCE: