The U.S. of Representatives moved to protect borrowers and improve lending disclosure by passing the Mortgage Reform and Anti-Predatory Lending Act late yesterday. Democrats were joined by 64 Republicans to pass the much needed bill by 291 to 127. Mortgage brokers and bank loan officers will have to be licensed and will have to register to be involved in mortgage lending - something that's been needed for years - if the legislation becomes law. No longer will they be able to make deals behind the scenes that cost borrowers more money for years in higher interest payments without fully disclosing the costs.
The bill, if passed by the Senate, would bar a lender from making a loan unless the borrower has a reasonable ability to pay and would set clear federal standards that apply to all lenders. The bill would also prohibit financial incentives to sell mortgages at higher rates than the borrower qualifies for. Brokers defend these incentives, known as yield spread premiums, as worthwhile for borrowers who want to finance certain expenses to hold down closing costs. But the higher rates cost them much more money over the life of loan. Many times the yield spread premiums are not even disclosed to the borrower. The bill's chief proponent, Rep. Barney Frank, said the bill will allow these premiums provided the borrower knowingly agrees to the higher rates.
The bill would also make Wall Street banks responsible for lending practices that violate this law even if their only involvement with the mortgage was to package and sell it as a security. This provision certainly will make banks much more cautious before putting together these securitized mortgage pools. But, banks must abide by Fannie Mae or Freddie Mac standards to sell the loans to these government-chartered entities, so a similar underwriting process is already in place and practiced regularly by the banks.
The White House is strongly opposed to the bill, as are some Congressional Republicans and the mortgage industry. They all insist this will reduce the number of available loans and make it almost impossible for poor people to get loans. But, isn't the problem now that the growing number of foreclosures involve people who could not afford to pay?
Do we really want an ongoing cycle of buying houses and then more foreclosures? If people can't afford the loan why should mortgage companies be permitted to sell them? Sure the mortgage brokers make money whether or not the borrower ultimately pays the loan, but aren't those profits on the backs of people who default while the rest of us suffer? Banks are stuck with loses and people who are making payments on time watch their home prices drop as more homes around them foreclose.
Senator Chris Dodd, Chairman of the Senate Banking Committee, expects to introduce his version of a mortgage bill in the Senate soon. Hopefully this can get done quickly so the markets know what to expect and can be able to begin the process of healing.
Lita Epstein has written more than 20 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and the "Complete Idiot's Guide to Improving Your Credit Score."
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Reader Comments (Page 1 of 1)
11-23-2007 @ 12:15PM
Marshall said...
Lisa, just a few observations regarding this post...
Regarding ysp, banks have never been required to disclose their version of ysp (called service release premium or SRP). This bill does NOT change that.
Brokers have a responsibility to disclose YSP within current RESPA law and related regulations. Those brokers not disclosing were already violating the law. The best service to the consumer would be to require all LENDERS, not just brokers, to disclose yield outside of closing whether YSP or SRP (even if approximated based on thay day's market return for that product). Basically, without a requirement like that which would establish more transparency and a more level playing field, this bill still allows banks (like countrywide, etc) to engage in high yield pricing practices with no knowledge by the consumer.
BTW, lowering HOEPA triggers (a banks's SRP is NOT included in that calculation while a broker's YSP is) at the lower loan amounts so aggressively, WILL harm lower income borrowers...just get a good faith estimate on a $60,000 home in TX and see what I mean...
Nationalized licensing requirements have been needed for a long time, that is truly in the consumer's and industry's best interest.
Oh, yeah, one more thing...the legislation of underwriting quidelines is absurd. Do we want the government to tell us which houses can or can't be insured? Do we want the government to say who gets life insurance/medical insurance? Of course not! The mortgage market has already adjusted it's standards to limit the risk level it is exposed to. Sub-prime is already nearing extinction and low-doc / stated income loans are reserved only for borrowers who have good asset reserves and sterling credit...why fix what no longer is broken (uw guidelines, that is)? Killing all stated income/no ratio loans will take a huge percentage of self-employed borrowers and small business owners out of the buying / refinacing eligible pool (these programs combined with liquid asset reserves and good credit have performed very well historically)...ultimately further lowering demand in an already difficult realestate market.
Thanks for all the good info...I just wanted to clarify a few things...moving away from the soapbox...
11-27-2007 @ 5:57AM
lisa said...
Lita,
Yah - what Marshall said...
I'm all for full disclosure and licensing (which by the way is already the law for mortgage brokers - it is the slippery corporations that don't license their loan officers and the banks that don't disclose the SRP not to be confused with YSP) BUT do you really believe that the government should legislate underwriting guidelines and decide for the consumer what is best for them? I'm as blue as the next democrat, but this bill smells an awful lot like, well - socialism.
Lisa
11-27-2007 @ 6:00AM
Lita Epstein said...
Lisa,
I don't see this effort as being much different than the standards set for licensing brokers dealing with securities trading.
Lita