UPDATE: House Passes Bill To Overhaul US Mortgage Lending
May 07 2009 - 3:55PM
Dow Jones News
Legislation to overhaul U.S. mortgage lending passed the House
Thursday as lawmakers sought to rein in practices blamed for the
foreclosure crisis.
The legislation is a tougher version of a bill that passed the
House in 2007 but later stalled. The current bill would establish
national minimum underwriting standards for home mortgages and
require originators to retain a portion of the credit risk of
mortgages they sell to third parties.
The legislation passed the House on a 300-114 vote.
Under the measure, mortgage lenders would be required to offer
home purchase mortgages that a borrower has a "reasonable ability
to repay." For refinancings, the lender has to believe the
transaction provides a "net tangible benefit" to the borrower.
A lender violating these rules would be required within 90 days
to modify or refinance the loan at no cost to make sure it meets
the standards. Otherwise, the borrower could rescind the loan. A
borrower would also have the right to sue companies that
securitized the loan and sold it to investors, where the rules have
been violated.
Tighter restrictions apply to the so-called high-cost mortgages
at the center of the subprime bust. The bill would ban "balloon
payments" and require prior counseling for such loans.
The legislation would also prohibit yield-spread premiums,
payments to mortgage brokers or loan officers for steering
borrowers to high-cost loans. And it seeks to revamp the mortgage
securitization process, widely blamed for fueling the shoddy
underwriting standards of the subprime boom.
House Financial Services Chairman Barney Frank, D-Mass., has
predicted the bill will be signed into law by the end of the year.
However, that timeline could be jeopardized by Senate Democrats'
slower pace. The Senate Banking Committee has yet to tackle the
issue of mortgage reform.
The credit risk of a securitized loan is born largely by
investors, not loan originators. The legislation would require
mortgage originators to retain at least 5% of the credit risk on
loans they sell to third parties. The bill gives federal banking
agencies the authority to set the level as well as leeway to make
exceptions to the rule.
Proponents say the measure will give lenders "skin in the game",
increasing the odds they will carefully underwrite the loan. The
mortgage banking industry and many Republicans contend the measure
would reduce mortgage credit for consumers. The industry warns that
large lenders would have to hold extra capital against their loans
and lenders that don't hold deposits would find it difficult to
compete.
The legislation provides a legal "safe harbor" for certain
mortgages that presumes they have met minimum underwriting
standards. The safe harbor also exempts these loans from the
risk-retention rules.
Qualifying loans include 30-year fixed-rate mortgages and other
prime fixed-rate loans as well as adjustable-rate mortgages that
meet certain standards. In addition, mortgages backed by the
government or Fannie Mae (FNM) and Freddie Mac (FRE) would
qualify.
Under the legislation, companies that securitize mortgage loans
would have to preserve the ability to identify the loans it has
sold and reacquire them if there were underwriting violations.
The legislation would also crack down on the appraiser industry.
State appraiser licensing agencies would have oversight authority
over appraisal management companies. The bill would bar appraisers
from having a financial interest in the dwellings they
appraise.
An amendment added to the bill would allocate funds from the
bill to help mortgage servicers warn delinquent borrowers that they
may be targets of fraud and inform them of how they can best
protect themselves.
Another amendment would prohibit third parties from charging
fees to consumers for mortgage modifications unless these actions
benefit the consumer.
House members also agreed to an amendment that would require
Fannie Mae and Freddie Mac to take into account factors such as the
health of the local or regional housing market when determining fee
schedules or occupancy and pre-sale guidelines for condominium and
cooperative housing mortgages.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
(Fawn Johnson contributed to this report.)