Mortgage Reform Debate Continues in Congress
Congress is looking at reforms to risky home loan lending practices, although a House subcommittee hearing Tuesday suggested that many lawmakers are still sorting out the workings of the market and wondering whether reforms will be necessary or helpful.
With the number of foreclosures nationally jumping 47 percent in March from a year ago, lawmakers are weighing whether new lending rules are needed or whether the market is already in the process of self-correcting.
The task of crafting reforms is made more complicated by the long list of players involved in problematic home mortgage transactions.
“There is a very complicated web of contributors to this issue that makes it very difficult and unwieldy to unwind,” said Rep. Melvin Watt, D-N.C.
Watt and other committee members said Congress needs to avoid unintended consequences of trying to fix the struggling housing market.
“It’s kind of like the Pillsbury dough boy,” said Watt. “If you push in one place, it juts out somewhere else.”
The oncerns were echoed by Rep. Carolyn Maloney, D-N.Y., the subcommittee’s chairwoman, although she made clear that Congress is willing if need be to address the issues.
“This committee is by no means waiting for the private sector to do what it thinks is right to solve this rapidly growing crisis,” she said.
Sen. Charles Schumer, D-N.Y., Sherrod Brown, D-Ohio and Bob Casey, D-Pa., have introduced a bill that would mandate tougher federal mortgage lender standards.
At the same time, Senate Banking Committee Chairman Christopher Dodd, D-Conn., was emphasizing that increased oversight and voluntary reforms by lenders are preferable to legislation.
The mortgage industry, in general, has argued that reform could restrict lending in the near term, hurting low-income, (or bad credit mortgage) borrowers - the intended beneficiaries.
Still, Carla Heiden, president of Wells Fargo & Co.’s mortgage lending division, testified Tuesday in favor of federal lending standards and national regulation of mortgage brokers.
Wells Fargo Home Mortgage, she said, already has a ban on many risky lending practices, including, for example, mortgage loans on which the principal balance can increase over time.
Big financial institutions and Wall Street investment firms have in recent years increasingly bought home loans in bulk from banks and lenders, and bundled them into securities to be sold to investors, theoretically spreading risk and helping provide more funds for lending.
Critics say the creation of this secondary market in mortgages caused housing lenders to be too lenient in evaluating high-risk or subprime borrowers.
Instead, they argue, mortgage broker groups and banks approved mortgages as quickly and as often as possible so they could profit from the huge demand for securitized mortgages.
Consumer advocates say investors in bundled or pooled mortgages should be held legally accountable for encouraging lax home loan lending practices.
They argue that mortgage holders should file lawsuits against investors and lenders if there’s proof that their actions were illegal or abusive.
But industry reps say investors, who had no direct role in loan approvals, can’t be held responsible for creating excesses in subprime lending.
Several lawmakers warned against overzealous reform efforts, citing a Georgia mortgage experience as a textbook case.
A predatory lending law was enacted in the state in the fall of 2002 that allowed borrowers to seek punitive damages from anyone who bought a mortgage loan or a security that included the loan.
In response, the three major credit-rating agencies decided they would no longer rate the credit quality of securities containing Georgia home loan funds. More than 25 lenders pulled out of the state in the wake of the agencies’ move.
Georgia’s legislature subsequently adopted a law limiting liability for mortgage loan abuses to original lenders.
SOURCE: Houston Chronicle