Key U.S. lawmakers raised concerns yesterday about the surge in nontraditional mortgages and the risks they pose to inexperienced borrowers unprepared to handle larger payments as the loans mature.

Poor underwriting standards and unclear information about the loan terms could undermine a borrower's ability to repay the loan, lawmakers said at a Senate Banking subcommittee hearing yesterday in Washington. Senators underscored the need for new federal consumer protections.

The loans "are destroying the lives of a whole lot of people," said Sen. Charles Schumer (D., N.Y.). "They are sold to people who are least experienced and most vulnerable."

The hearing was a sign that government scrutiny of nontraditional mortgages, such as interest-only loans, is increasing. The popularity of the loan has risen since 2003 in response to the booming housing market. Some senators criticized mortgage lenders for allowing lax underwriting standards to secure loans.

"It seems to me, there's been a race to the bottom" in the underwriting standards for mortgages in recent years, Sen. Jim Bunning (R., Ky.) told bank and thrift regulators testifying before the panel. "Lenders have granted larger loans to borrowers who are less able to afford them and based on less documentation."

Bunning asked regulators if more defaults are likely given rising interest rates and reduced home equity unless borrowers can refinance or sell. Sandra Braunstein, director of the consumer and community affairs division at the Federal Reserve, said it was too soon to tell.

Regulators proposed guidelines in December 2005 calling on lenders to determine a borrower's ability to repay the loan after the introductory period and ensure that consumers understand the loan terms and the long-term risks involved before committing to a payment option.

The loans offer borrowers otherwise priced out of the market access to expensive homes through reduced monthly payments in the early years of the loan when payments on the principal - and, in some cases, the interest - are deferred. They also carry greater potential for default and foreclosure because payments can jump significantly.

The loans include interest-only mortgages, where a borrower pays only interest for the first few years, and payment-option adjustable-rate mortgages, which allow borrowers to make minimal payments that could lead to negative amortization.

Nontraditional loans represented 30 percent of all mortgages issued in 2005, compared with 4 percent in 2002, according to First American Loan Performance, a mortgage-data company based in San Francisco.

Regulators said mortgages could be confusing, and borrowers often underestimate the loans' long-term implications. The main risk occurs when a loan is modified and the monthly payment can double or triple, said Sandra Thompson, acting director of the supervision and consumer-protection division of the Federal Deposit Insurance Corp.

Another risk is negative amortization, an increase in the loan balance when the monthly payments do not cover the interest owed. This happens when interest rates rise and home values do not rise as fast, Thompson said. Current mortgage disclosure requirements were not designed for those types of loans, she said.

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