House Revives, Toughens '07 Mortgage Bill
Friday, April 24, 2009
A House bill that targets abusive mortgage lending has been resurrected in tougher form after stalling in the previous Congress, and lawmakers began working on it yesterday at an all-day House Financial Services Committee hearing.
The measure aims to prevent a repeat of the recent mortgage market meltdown by holding lenders more financially liable for the loans they make and requiring them to make those loans only to borrowers who can reasonably be expected to repay them. It also would crack down on institutions that pool the loans and sell them as securities.
Although a similar measure passed the House in 2007, a companion bill failed to reach the Senate floor. The outlook for the new bill in the Senate remains a "a tossup," said Rep. Brad Miller (D-N.C.), who co-authored the bill with Rep. Melvin Watt (D-N.C.) and the committee's chairman, Rep. Barney Frank (D-Mass.). The House Financial Services Committee plans to vote on the bill next week and send it to the full House soon after.
The industry has resisted federal regulation in the past and expects to push back on some provisions. But it has accepted that some of the changes are inevitable, said Jaret Seiberg, a policy analyst at Washington Research Group, a unit of Concept Capital, whose clients have included mortgage investors. "The provisions that a year ago seemed so onerous now appear reasonable given the pain that housing has caused the economy," he said.
One industry group even apologized to the committee for the mortgage practices of recent years and vowed to cooperate. In prepared testimony, John Dalton, president of the Financial Services Roundtable's Housing Policy Council, said the lending system was flawed and "misused by some."
"I apologize for these mistakes and misjudgments," Dalton said.
Although the old bill mainly targeted subprime lending practices, the new measure is broader, and its toughest rules would apply to loans that are not traditional 30-year, fixed-rate mortgages. Critics say it would discourage adjustable-rate mortgages and nontraditional loans. Such a one-size-fits-all approach will not work, Dalton said.
"Many highly qualified borrowers would prefer to have rates that adjust or repay their loans more rapidly than 30 years," he said in his statement. "Those borrowers should not be penalized under an assumption that a 30-year, fixed-rate loan is the only appropriate loan."
Most troublesome for the industry is a provision that would require lenders to retain a 5 percent stake in nontraditional mortgages until the loans are paid off.
In the past, many lenders sold the loans they originated and were therefore off the hook if the loans went bad. Frank has said that requiring lenders to retain some risk in a loan's performance would encourage more prudent lending.
Industry officials disagree. They say the provision could destroy small to medium-size lenders, including mortgage banks that do not take deposits and do not hold on to large amounts of cash. Many lenders, including larger ones, might respond by making fewer loans, raising interest rates or both, David Kittle, chairman of the Mortgage Bankers Association, said in his statement to the committee.
Frank said the goal is not to aid the industry but to create a more stable mortgage system. "If the argument is: 'We want to be in the business of lending money, but we don't have any,' I think that may be how we got into the problem," he said.
Some consumer groups say the bill does not go far enough. The National Consumer Law Center, testifying on behalf of several consumer organizations, said it will not support the legislation in part because it would preempt some tougher state laws and fail to set clear rules.
"This bill is so confusing that, if passed in its current form, there will be extensive litigation just to work through what the various provisions mean," said Margot Saunders, the group's counsel.
Meanwhile, the Senate could take up legislation to allow bankruptcy judges to modify the mortgages of troubled homeowners as soon as Thursday, according to a congressional source, who spoke on condition of anonymity.
Sen. Richard J. Durbin (D-Ill.) has been negotiating with large banks, including J.P.Morgan Chase and Bank of America, on a compromise version of the proposal, but have yet to reach an agreement, the sources said. Progress is being made and bill language is being drafted.
Several scenarios are being considered for bringing the legislation to the floor, but no decision has been made, the source said. The provision is fiercely opposed by the financial services industry, which argues it could drive up mortgage rates and their losses. The industry is particularly opposed to allowing bankruptcy judges to lower the principal balance owed by borrowers, known as "cramdown."