Washington Report: Mortgage Reform Bill

Realty Times
April 6, 2009
Harney, Kenneth R.

A sweeping new mortgage reform bill recently introduced in the U.S. House of Representatives is drawing support from consumer advocates. The measure would discourage lenders from signing off on anything other than traditional 30-year, fixed-rate loans with complete documentation and strict underwriting. Any other type of financing would require the originating lender to keep no less than a 5-percent ownership interest in the loan for its life cycle -- even if it is bundled and sold on the secondary mortgage bond market -- meaning that the lender would share in any loss should the loan sour. The legislation also establishes a new "federal duty of care" under which lenders would be legally responsible for making sure that a finance deal is appropriate for the borrower in terms of income and ability to repay the debt. Additionally, another provision of the bill addresses the practice of rewarding mortgage brokers financially for steering clients into high-cost loans. Supporters say controls such as these would have helped prevent mortgage lending excesses during the previous housing boom, especially with regard to negative amortization, no-documentation, and zero-down deals.