The U.S. House and Senate will start on refining mortgage legislation Tuesday. The legislation would enforce the biggest overhaul to mortgage lending rules in decades. The mortgage legislation, part of the financial reform bill, is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working overtime to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.
Mortgage rules to prevent another financial crisis
Proposed changes to mortgage lending rules include new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that most of these rules will affect how expensive mortgages will be and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine requires lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that imploded and caused the financial disaster.
Will mortgage lenders behave?
With mortgage legislation that requires lenders to hold a stake, the idea is that they will act more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans that were destined for default. The Wall Street Journal reports that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and don’t include interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at 3 percent of the loan.
More expensive mortgages with new rules?
Banks say new mortgage lending rules about risk retention will make mortgages more expensive for consumers because banks will be required to hold more capital, a challenge for smaller lenders. But Housing Watch said consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules will make more paperwork for borrowers, but they already push a lot of paper trying to get loans in today’s constricted credit markets. More diligence from banks about verifying a borrower’s income to prevent default should be good for everyone.
Protecting borrowers from predators
New mortgage lending rules also include compensation guidelines that prevent lenders from making more money by making riskier loans. This provision of the financial reform bill would bar lender-paid commissions based on the rate or type of loan. The Wall Street Journal reports that brokers say that the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Barry Zigas, director of housing policy for the Consumer Federation of America told the Journal that the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”
Saving mortgage lenders from themselves
Other new mortgage rules that industry lobbyists are fighting include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also don’t like the rule that requires them to prove that it is in the borrower’s best interest to finance a loan, instead of just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders don’t want borrowers to be able to sue them if they violate the new mortgage rules. Industry lobbyists say this would make buying mortgages too risky for investors.