Regulators Wary of 'Risk Layering' on Alternative Products.

WASHINGTON -- Federal regulators stuck to their guns in issuing tough final guidance on interest-only and payment-option lending, but opinions are divided over the impact it will have. But few think the new guidance will cause volumes to plummet.

The Mortgage Bankers Association accused the regulators of overreaching and forcing lenders into a "one-size-fits-all underwriting standard that will unnecessarily choke industry innovation and diminish consumer choice."

Many expect the guidance will force federally insured banks and thrifts to tighten their underwriting standards, giving independent mortgage banks and Wall Street conduits a competitive advantage.

It could also force some banks to exit the business, which would reduce originations and buyers for these loans.

But Rudy Orman, a subprime industry veteran who joined Goldman two years ago from Countrywide Home Loans, said over the past two months he has seen scores of lenders rolling out their own version of payment-option ARMs.

Still, some believe the guidance could slow originations of exotics as depositories implement the new, detailed guidance, assuring that their mortgage brokers and correspondents are complying with the new underwriting standards.

"As anticipated, the guidance is very tough and includes no 'out' for sales to the secondary market," according to Federal Financial Analytics managing partner Basil Petrou.