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Zero Hour on Mortgage Reform: Forthcoming Congressional Vote Is Key
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Zero Hour on Mortgage Reform: Forthcoming Congressional Vote Is Key

The mortgage bill up for vote cannot be weakened if policymakers are to truly stabilize the home lending market, writes Tim Westrich.

The House of Representatives will vote tomorrow on the Mortgage Reform and Anti-Predatory Lending Act, legislation that will address the worst abuses in the mortgage market for future borrowers. The purpose of the bill is to not only to prevent borrowers from facing the same fate as the families currently suffering amid the tidal wave of foreclosures, but also to stabilize the credit market on Wall Street, which was shaken earlier this year as abusive loans went into default.

Compromise is almost always a necessary step in enacting legislation of any kind, but if this bill is weakened by the full House it could lose its muscle altogether. The sad result would be a failure to restore integrity to the home mortgage market.

As originally introduced, the bill took a strong, all-inclusive approach to putting boundaries on the reckless subprime market. The bill would have eliminated the most abusive features of home loans—some of which have led to the tidal wave of foreclosures. Among its provisions, it would require subprime lenders to determine if the borrower has the ability to repay the loan when taking into account the fully indexed interest rate and fully amortized payment on adjustable-rate loans. Many subprime borrowers qualified for adjustable-rate loans at low “teaser” interest rates, only to see their payments leap to levels they could not afford when the introductory period ended.

While other solutions are still necessary … Congress is faced with the opportunity to ensure families who take out loans in the future will have access to more responsible products.The bill would also establish a so-called “duty of care” so that loan originators are subject to a fiduciary responsibility to their borrowers, and it would prohibit other abuses such as yield-spread premiums and prepayment penalties on subprime loans. While the subprime lending market is intended to serve borrowers with less-than-perfect credit histories, these tricky terms are virtually unseen in the prime market.

A clean-up of the subprime market has been long overdue. Many families have defaulted due to predatory loan terms such as these, and these defaults have shaken the credit market in the latter part of 2007.

But in order to gain enough support to get the bill to the floor, a substitute amendment was introduced in the House Financial Services Committee last week to give the bill broad support—at the expense of watering down one of the bill’s key pro-consumer provisions. The original bill provided for safe-harbor provisions to protect mortgage securitizers—those who buy mortgages and bundle them for sale as securities on the secondary market—from liability if they meet certain due-diligence requirements. Buyers of loans that do not fit into safe-harbor provisions would have legal responsibilities to the borrowers—meaning borrowers could take legal action on subsequent holders of their mortgages should they discover an abusive feature.

This amendment, however, has made safe-harbor provisions so broad as to leave very little remedy for the borrower. It also prevents borrowers from taking class-action lawsuits against holders of bad loans. Under this system, borrowers have very little recourse should they default due to an abusive term on their loan, and Wall Street won’t have enough incentives to stop buying up loans of this type.

In the face of forces that are still pressing to water down other parts of the bill, Congress must ensure a strong bill that will clean up the market. Give and take, of course, is a key element of legislative decision-making, but with the bill already compromised it would be bad policy to weaken it any further. While it is in the best interest of low- and moderate-income consumers that legislation not deter our capital markets from providing capital through securitization, we have seen how the demands of the secondary market for products, regardless of credit quality or predatory terms, drove questionable practices.

Currently, the bill is written so that its provisions would not supersede any state laws that provide for stronger remedies. In fact, the bill would set a high bar for states that currently have no substantive predatory mortgage lending laws. The last thing Congress ought to do is set up federal regulation that limits states’ abilities to police abuses within their own borders. Rather, Congress ought to focus on improving the federal regulators that passively looked on as abuses rose.

We are hopeful that Congress sees great value in restoring integrity to the mortgage market and will pass a strong bill. After all, many working families store their wealth in their home equity, and too many have lost their wealth due to foreclosures. One in five subprime loans made in 2005-2006 will end in foreclosure, according to the Center for Responsible Lending. And the Joint Economic Committee of Congress recently estimated that each foreclosure costs $227,000, which includes the lost equity in the foreclosed property, neighboring house values, lender costs, and the costs of additional municipal services.

While other solutions are still necessary to assist families currently undergoing foreclosures, Congress is faced with the opportunity to ensure families who take out loans in the future will have access to more responsible products.

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