Payment-option loans under attack

Regulators at the Federal Reserve Board, FDIC and three other agencies are cracking down on various payment-option and interest-only loans due to the financial risks they pose to home buyers and lenders. The regulators want to impose creditworthiness restrictions and disclosure requirements, forcing lenders to be certain that borrowers understand the potential dangers.

Payment-option mortgages have soared in popularity in the last three years. They typically allow borrowers to choose among one of four payments each month: a "minimum" payment based on an artificially low start rate; an interest-only payment involving no principal reduction; or traditional amortizing over 15- or 30-year schedules.

Final regulations are expected within the next couple of months.