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Mortgage Lending Reform: A Comprehensive Review of the American Mortgage System

March 11, 2009
Mortgage Lending

We suggest a broad, simple framework that addresses the entire mortgage market and that focuses on the underlying incentives in that market. The legislation should establish a bright-line ban on dangerous loan features such as prepayment penalties and "no-doc" loans as well as on market-distorting incentives such as yieldspread premiums. All mortgage origination should be subject to rules that discourage originators from placing people in mortgages that are more expensive than those for which they qualify or that they cannot afford to sustain. Most important, all participants in the mortgage origination and purchase chain must have "skin in the game" with real consequences for violating the law.

In this testimony, we discuss six important principles that this year's mortgage lending reform legislation should incorporate:

  • Mortgage lending legislation should be simple and straightforward, which will benefit all market participants from the consumer through the investor.
  • Mortgage originators should serve the best interests of their customers by putting them into appropriate products with sound terms and conditions that do not have prepayment penalties or yield spread premiums.
  • The secondary market should have "skin in the game" by sharing responsibility for the terms of the loan.
  • For homeowners in trouble, mortgage servicers must attempt to save the home before filing foreclosure.
  • Consumers should be able to assert their rights in a timely, meaningful and comprehensible way.
  • States and localities should be able to protect their residents quickly and effectively.

For questions about this testimony, contact Julia Gordon at or (202) 349-1878.