Predatory Mortgage Lending's Days Numbered
WASHINGTON - Once again, Congress will take up legislation to bar mortgage companies from steering homebuyers into houses they can't afford.
The House of Representatives voted on the matter nearly two years ago, but the measure died in a Senate committee. Since then the economic and political landscape has changed dramatically.
The foreclosure rate has skyrocketed, the national unemployment rate has jumped, and most of the American public blames financial institutions for the recession. Democrats have increased their numbers in the House and Senate, and they now hold the White House. Also, Congress has twice voted to bail out banks that are foundering because of the toxic housing loans on their books.
To prevent more bad mortgages from being approved, two North Carolina representatives - Democrats Mel Watt and Brad Miller - are again pushing a "predatory" lending measure. The bill, based on North Carolina law, aims to do a simple thing: Make sure that homeowners can afford their loans.
"It seems inarguable," said Julia Gordon of the Durham, N.C.-based Center for Responsible Lending, who will testify about the bill Thursday before the House Financial Services Committee. "People are surprised that wasn't required before."
The bill, called the Mortgage Reform and Anti-Predatory Lending Act of 2009, would end bonuses for brokers who steer borrowers into higher-priced loans. It would require brokers to confirm borrowers' income, and it would prohibit brokers from making new loans or refinanced loans that don't offer tangible net benefits to borrowers.
In the past, brokers often failed to confirm incomes or homeowners could get away with lying about their salaries. Borrowers often signed off on new or refinanced loans with adjustable rates, not realizing that their monthly payments soon would escalate beyond their means.
Consumer advocates also say that lenders often paid brokers bonus fees, including some known as "yield spread premiums," for steering borrowers into higher rates than those for which they'd qualified.
Buried in the bill's legalese, however, are details that could make a difference in whether lenders or investment companies down the line shoulder the risk, whether homeowners can recover from bad loans before or after going into foreclosure, and whether state laws will protect homeowners or leave them to a weaker federal law.
The details have led some consumer advocacy groups to withhold their support, at least for now, and the mortgage industry is still trying to exert its influence.
"I think there is a deeper level of understanding about the need for more aggressive regulation of lenders," Watt said this week in an interview. "The whole industry needs a set of good regulations around it."
But in the current economy, more regulation could hurt borrowers if lenders lose flexibility on the types of loans they can offer, said Rep. Patrick McHenry, R-N.C.
"When you restrict lending opportunities you restrict people's access to credit," McHenry said.
McHenry, a member of the House Financial Services Committee, said he supported getting rid of "bad actors" in the mortgage market, but that this bill wouldn't do that.
"It's moving in the wrong direction at the wrong time," he said.
The practices that the bill targets affected not just homebuyers but also borrowers who refinanced their mortgages.
In the first three months of this year, the number of families threatened with losing their homes jumped 24 percent over the same period last year, according to RealtyTrac, which tracks foreclosures.
Dean Baker, a co-director of the Center for Economic and Policy Research, a Washington research center, said that lawmakers and the public realized now that predatory lending didn't affect just low-income borrowers.
"Two years ago there was this idea it was a poor people's issue, and if these people can't look out for themselves, it's just too bad," Baker said. Now, he said, "people realize how widespread this problem is."
Against this backdrop, consumer advocacy groups and mortgage industry representatives will testify about the bill Thursday before the House Financial Services Committee. The committee's chairman, Rep. Barney Frank, D-Mass., is a co-sponsor of the bill.
A committee vote could come as soon as next week, with a full House vote to follow.
"They're going to feel a need to do something," Baker said. "And then the question is, will it be something for show or will it have teeth?"
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