Short Sided Mortgage Reform Bill

Freddie Mac’s most recent mortgage market survey shows that a thirty-year home loan with fixed interest rates that dropped to 4.80% this week.  At the same time, congress is putting their finishing touches on HR 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009 that claims to address several aspects of the mortgaged origination, loan securitization and servicing process. The mortgage bill was debated Thursday at a House Financial Services Committee hearing.  HR 1728 would require loan officers to determine a borrower’s ability to pay back a home loan, and only extend mortgage refinancing when there is a “net tangible benefit” to the borrower. Loan officers would no longer be able to collect yield-spread premiums or other compensation that many critics say served as incentives to steer borrowers into higher risk home mortgages that cost the consumer higher fees and terms that benefit the mortgage lender.

Last week, Fed Chief, Ben Bernanke talked about the need for government regulation to protect homeowners and American consumers. The central bank had approved new home financing regulations aimed at curbing abuses on home mortgages. The mortgage lending revisions would restrict mortgage lenders from offering home mortgages without proof of a borrower’s income and would require lenders to make sure risky borrowers set aside money to pay for taxes and insurance.  As FHA loan market-share grows, so does the risk for defaults, foreclosures and more “egg on the face” for mortgage companies that originate FHA mortgage loans.

The mortgage reform bill would also drop the trigger for mortgages to be considered “high cost” and subject to the more stringent requirements of the Home Ownership and Equity Protection Act (HOEPA). Mortgage lending companies remain adamant that home loans subjected to HOEPA are difficult or impossible to securitize and sell to secondary-market investors.  To encourage responsible lending, the bill would also create a limited “safe harbor” from lawsuits for “qualified mortgages” prime, fully documented, thirty-year mortgage loans. Those mortgages would be exempt from some of the bill’s requirements.  I find that “exemption” very interesting.  Let me tell you this smells like a short-sided mess that enables the politicians to pat themselves on the back while enhancing their image as “tough” on mortgage crooks.  From a distance it looks great, but they appear to be tacking this bill on poor legislation that lacks the foundation we need for fair and responsible lending.  - Commentary written by Jason Cardiff.