From the LA Times. "Federal regulators are casting a disapproving eye on mortgages that give borrowers low introductory rates but let them pile up more debt over the long run, a loan feature favored by hundreds of thousands of Californians."

"Starting this month, federally chartered lenders are being discouraged from qualifying buyers based on the low starter rates, when only the interest or a portion of the interest is due. Instead, they are being urged to evaluate the borrower's ability to pay for the loan at the full rate."

"Regulators are trying 'to add some discipline to the lending process,' said Richard Wohl, president of Pasadena-based Indymac Bank. 'Whenever you do that, you're going to have some [borrowers] that won't have the product available to them.'"

"The regulators say they will 'carefully scrutinize' lenders to see whether they are following the new rules. Those who fail to do so, the guidance summary warns, 'will be asked to take remedial action.'"

"The guidance applies only to federally chartered lenders, including Indymac, Countrywide Financial Corp., Washington Mutual Inc. and other behemoths. State-chartered banks, which are smaller but more numerous than federal banks, are not affected."

"Indymac's option ARM business is shrinking anyway, Wohl said, as interest rates fall and customers move to the certainty of fixed-rate loans. Even so, interest-only and option ARM loans accounted for more than half of first-time mortgages and refinancings in the state in July, according to First American LoanPerformance."

"Kathy Dick, deputy U.S. comptroller for credit and market risk, said interest-only loans and option ARMs originally were for a minority of savvy, well-off people whose income was variable, the self-employed and those who worked on commission or were paid intermittently."

"'Now they're used to get someone into a home without a real analysis of their ability to pay,' Dick said. 'Lenders are qualifying people for homes they can't afford. We felt that wasn't consistent with prudent lending principles.'"

"'Just as the loosening of credit standards made the housing bubble go higher and last longer, the tightening of standards is going to make it deflate further and faster,' said Michael Calhoun, president of the Center for Responsible Lending. As borrowers find they qualify only for smaller loans, Calhoun predicted, sellers will have to cut their prices."

"'There's some pain coming,' he said, noting that California 'is at ground zero on this.'"

"'There will be fewer leveraged loans of this kind, and it will depress some home prices,' said Allen Fishbein, director of housing and credit policy for the Consumer Federation of America."

From CNN Money. "Mortgage rates have been trending down, but that won't do much to benefit those who signed up for low-teaser-rate adjustable-rate mortgages in the past few years. The jump in payments could be even bigger for some people. They could have a loan balance that's larger today than it was when they got their mortgage, a situation called negative amortization. And it's common with what are called 'payment option' ARMs."

"There may be a trigger ceiling, meaning when the balance reaches a certain level, say 120 percent of the original balance, the introductory terms will end and the rate will reset upward, according to (researcher) Christopher Cagan. In the past two years, homeowners took out 1.3 million ARMs with teaser rates below 2 percent, according to Cagan's research. Of those, 21.5 percent have negative equity."

"Certified financial planner Mari Adam knows of a couple who has experienced this mortgage nightmare first hand. With two kids in college, the two-earner couple thought they could lighten their load by refinancing their fixed rate mortgage into a low-rate ARM."

"They got a 1.2 percent ARM in February with a monthly minimum payment of $1,372. By April, the loan rate had reset, jumping to 8.375 percent and their balance had ballooned by $3,000 in two months' time."

"Their new monthly payment: $2,216 if they want to pay interest-only or $2,300 if they want to start paying down principal as well. 'I'd call this an obscene loan,' Adam said."

"The couple who have lived in their home for several years, still have some equity left, less than before but at least they have some. Others aren't so lucky. A lot end up with negative equity. That makes it very tough to refinance to a better mortgage, putting them at risk of foreclosure. And selling may not be an option to cure the financial headache given the recent downturn in home prices."

"Next time you want to buy a home with a mortgage, be sure to read all the documentation (footnotes included), ask lots of questions and, Adam said, remember, 'when someone offers you a below-market or above-market rate, something is wrong.'"