The Nation's Housing

Congress Takes A Serious Look At Reforming the Mortgage Market

By Kenneth R. Harney
Saturday, April 4, 2009

Congress is preparing to take up a comprehensive plan that would fundamentally reform the home mortgage market, starting this year.

Had the same rules and standards been in place earlier in the decade, congressional supporters say, it could have eliminated much of the funny-money loans, slipshod underwriting and Wall Street abuses that distorted the market from 2002 through 2006. The boom wouldn't have been as big, and the bust might not have happened.

The Mortgage Reform and Anti-Predatory Lending Act of 2009 (H.R. 1728) was introduced March 26 by co-authors Reps. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, Brad Miller (D-N.C.) and Melvin Watt (D-N.C.) It is expected to move quickly through the House this month and go to the Senate by May. The odds of passage in some form are high, according to banking and housing industry lobbyists.

The bill is a tougher version of one pushed by Miller in 2007 that passed the House but foundered in the Senate. This year, as a result of stronger Democratic majorities in both houses, "the political climate has changed," Miller said. "The foreclosure crisis has wreaked havoc on middle-class families and our economy as a whole. The industry's arguments for watering the bill down are not at all convincing."

Here's what the legislation would do:

-- Ban all fees paid to loan officers that are tied to the interest rate or type of mortgage. During the headiest years of the boom, Wall Street investment banks paid mortgage brokers higher fees if they originated exotic loans such as short-term subprime adjustables, interest-only, payment-option, and "stated income" no-documentation loans with minimal or no down payments.

The lending industry also routinely paid brokers more for originating mortgages that carried rates above prevailing levels. Loan officers frequently steered applicants with marginal credit histories into loans with excessive rates and penalties -- and were paid more by banks and Wall Street for doing so. Studies have documented that minority and first-time borrowers disproportionately were marketed loans with unnecessarily high fees and penalties, based on their credit scores.

The new bill would prohibit any compensation -- "direct or indirect" -- that is tied to the rate or terms of the mortgage. "There should be no way you can be compensated for steering anyone to a higher rate," Frank said in an interview. The bill does permit home buyers or refinancers to opt for a slightly higher note rate to finance closing costs.

-- Create mandatory minimum national quality standards for all mortgages. The rules would encourage lenders to make fully documented 30-year, fixed-rate loans at prevailing market rates, as opposed to loans with higher-risk features such as adjustable payments and negative amortization. The bill would also impose a new federal "duty of care" standard requiring loan officers to offer applicants only terms and rates that are "appropriate" to their income and ability to repay. Refinancings would have to pass a "net tangible benefit" test demonstrating that the replacement loan is superior to the borrower's current terms. Lenders would have to offer applicants the option to choose any loan without a prepayment penalty attached. Mandatory arbitration clauses in most home mortgages would be banned.

-- Allow borrowers who are put into mortgages that violate the new law to seek immediate legal redress through cancellation of the entire loan contract, refund of all payments and fees, plus lender compensation for legal costs.

Borrowers who lied or committed fraud on their loan applications would have no such recourse. The bill would also extend liability for rule violations to third-party securitizers who buy loans for repackaging into mortgage bonds. Originators of all but fully documented 30-year, fixed-rate loans would be required to retain at least a 5 percent stake in the loan until it's paid off. If the loan goes into default, they would retain some economic stake in the losses.

Francis Creighton, vice president and chief lobbyist for the Mortgage Bankers Association, said that while his group supports many of the principles in the bill, forcing small and medium-sized mortgage companies to set aside capital to cover 5 percent of their loan production would be difficult for them financially.

Why are the banking and mortgage industries generally more supportive of the new reform proposals? Anne Canfield, executive director of the Consumer Mortgage Coalition, which represents many of the largest firms in the field, put it this way: "We just don't want anything like what happened" -- the boom, the bust, the huge losses and the credit crisis -- "to ever, ever happen again."

Kenneth R. Harney's e-mail address is

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