Lobbyists Fight To Weaken New Mortgage Guidelines In Financial Reform

Tuesday the US House and Senate plan to start refining mortgage legislation. The legislation would apply the biggest overhaul to mortgage lending rules in many years. The mortgage legislation, which is actually part of the financial reform bill, is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working overtime to take the teeth out of provisions that could protect consumers and limit the industry's ability to find loopholes in underwriting standards.

Resource for this article: Lobbyists fight to weaken new mortgage rules in financial reform by Personal Money Store

Mortgage rules to prevent another economic crisis

Proposed changes to mortgage lending rules consist of a whole lot of new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that these rules will affect how expensive mortgages will be and what types of mortgages could be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine demands numerous of the lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that caused the financial disaster.

Are the mortgage lenders going to behave?

With mortgage legislation that needs lenders to hold a stake, the idea is that they'll act a lot more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans that were definitely going to default. It was reported by the Wall Street Journal that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower's income and assets and don't contain interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at around 3 percent of the loan.

Mortgages that are more costly with new rules?

Banks say the new mortgage lending rules about risk retention will make mortgages a lot more costly for consumers because banks can be required to hold a lot more capital, a challenge for smaller lenders. But Housing Watch explained that consumer groups support "encouraging the market" to sell safer products. New mortgage lending rules are likely to make more paperwork for borrowers, but they already push many paper trying to get loans in today's constricted credit markets. More diligence from banks about completely verifying a borrower's income to prevent default should be good for everyone.

Finding a way to protect borrowers from predators

New mortgage lending rules also consist of some compensation guidelines that prevent lenders from making a lot more money by making riskier loans. This provision of the financial reform bill would make sure there are lender-paid commissions depending on the rate or type of loan. The Wall Street Journal reports that brokers say the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. All of the consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Director of housing policy for the Consumer Federation of America, Barry Zigas, told the Journal the new provisions will shift the burden of proof "from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs."

Saving mortgage lenders from themselves

Other new mortgage rules that industry lobbyists are fighting include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also do not like the rule that needs them to prove that it is in the borrower's best interest to finance a loan, rather than just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders do not want borrowers to be able to sue them if they discover some way violate the new mortgage rules. Industry lobbyists say this would make purchasing mortgages too risky for investors.

Citations

Housing Watch

housingwatch.com/2010/06/21/new-mortgage-rules-may-hurt-borrowers/

Wall Street Journal

online.wsj.com/article

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