Nontraditional Mortgage Product Risks

Prev Question Next Question

Question

Which of the following comes under the heading of nontraditional mortgage product risks?

Answers

A. Reduced documentation adds risk to a mortgage loan. Institutions may rely on reduced documentation in the credit underwriting process. Income and credit verification may not be obtained. Use of reduced documentation should be subject to clear policies that require more documentation when the credit risk rises

B. Reduced documentation adds risk to a mortgage loan. Institutions may rely on reduced documentation in the credit underwriting process. Income and credit verification may not be obtained. Use of reduced documentation should be subject to clear policies that require more documentation when the credit risk rises

C. Perform due diligence before entering into third-party relationships, including a review of the third party's General competence Business practices and operations Reputation Financial capacity Internal controls Record of compliance with laws

D. Amounts credited as recovery on a loan must not exceed all principal, finance charges, and fees previously charged off. Amounts that exceed these must be credited as income

Show Answer

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

The correct answer is A: Reduced documentation adds risk to a mortgage loan. Institutions may rely on reduced documentation in the credit underwriting process. Income and credit verification may not be obtained. Use of reduced documentation should be subject to clear policies that require more documentation when the credit risk rises.

Nontraditional mortgage products refer to loans that have features that are different from traditional fixed-rate mortgages, such as adjustable interest rates, interest-only payments, and payment options that include negative amortization. These types of loans may have risks that are different from traditional mortgages, and therefore institutions that offer them should be aware of these risks and manage them appropriately.

One of the risks associated with nontraditional mortgage products is the use of reduced documentation in the credit underwriting process. This means that the lender may not obtain sufficient documentation to verify the borrower's income, assets, and other factors that are typically used to assess creditworthiness. This can lead to a higher risk of default if borrowers are unable to make their payments.

To manage this risk, institutions that offer nontraditional mortgage products should have clear policies in place that require more documentation when the credit risk rises. This can help ensure that borrowers are able to repay their loans and reduce the risk of default. In addition, institutions should also consider other risk management strategies, such as stress testing and monitoring of loan performance.

Option C refers to due diligence before entering into third-party relationships, which is important for managing operational and reputation risks. Option D refers to the accounting treatment of recoveries on loans and is not directly related to nontraditional mortgage product risks.

Prev Question Next Question