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House Passes Major Mortgage industry Reforms

May 7, 2009 - by Donny Shaw

The House today passed a bill that, to my mind, is a fairly significant response to the subprime mortgage mess that is at the root of the current economic crisis. The bill, known as the Mortgage Reform and Anti-Predatory Lending Act, would ban pay incentives for mortgage brokers to steer borrowers into high-priced loans, require brokers to ensure that borrowers have a “reasonable ability” to repay the loan they are getting and require that all refinancing transactions provide a “net tangible benefit” for homeowners. If brokers fail to meet these requirements, they would be liable to be sued.

Another provision in the bill is aimed at keeping bad mortgages out of the secondary mortgage market. Under that provision, banks that give out loans would have to retain at least five percent of the credit risk of the loan as a hedge against risky lending. For a more detailed description of the bill, including key excerpts form the legislative text, see my previous post on it.

The bill passed by a vote of 300-144, with 60 Republicans and almost all Democrats voting in favor. Three Democrats voted against the bill:

Rep. Bobby Bright [D, AL-2]
Rep. Ann Kirkpatrick [D, AZ-1]
Rep. Kurt Schrader [D, OR-5]

Before passing the bill, the House made several changes to it by way of amendment. Most were minor, non-controversial and passed overwhelmingly by voice vote. Three, however, stand out as worth mentioning.

The first, which is actually an undoing of a change that was made in the committee process, is an amendment from Rep. Barney Frank [D, MA-4]. The amendment alters language that Rep. Michele Bachmann [R, MN-6] added to the bill during mark-up. Bachmann’s language was designed to keep housing counseling funds provided in the bill from going to ACORN. It read: “any organization which has been indicted for a violation under Federal law relating to an election for Federal office” shall not be eligible for funding. As Frank explained in a “dear colleagues” letter he sent out before today’s vote, he read Bachmann’s amendment too hastily during the committee mark-up and overlooked the fact that it was aimed at “indicted” organizations, not “convicted” ones. On the House floor today Frank said that denying money to organizations that had simply been “indicted” would be “a violation of basic principles of fairness.” He added that he would have been more sympathetic to Bachmann’s amendment if it was aimed at organizations with a “pattern of indictment.”

The second is an amendment that was adopted by voice vote today from Rep. Ed Perlmutter [D, CO-7]. His amendment reduces the length of the grace period renters would be given to move out of their homes if the owners of the property are foreclosed on. The bill as originally written and passed in committee would have required renters to be notified and given 90 days to find a new home if the home they are renting is foreclosed upon. Perlmutter’s amendment lowers that to 30 days. His reasoning: people that might be interested in buying the property “should not be deprived of the opportunity to come and look at it.”

The third, which also passed by voice vote, is not really substantial, but kind of interesting. The amendment, offered by Rep. Lincoln Diaz-Balart [R, FL-21], “requires the Secretary of HUD to study the effects of the presence of Chinese dry wall on foreclosures and the availability of property insurance for residential structures where Chinese dry wall is present.” This is an issue that I have never heard of, but a WWSB ABC 7 article I found from the OpenCongress news coverage of the bill explains that drywall imported from China that was used in new home construction in Florida during the housing boom is giving off dangerous fumes and driving homeowners out of their homes. “Without any available assistance many homeowners are forced to decide whether to live in an impacted home or walk away and accept foreclosure in order to protect the safety of their family,” said Rep. Vern Buchanan [R, FL-13] in the article.

So far, there has been no word from Senate Banking Chairman Chris Dodd [D, CT] or the Senate leadership that they plan to pass this bill or a bill similar to it. We’ll keep you posted on any developments.

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Comments

  • Anonymous 05/08/2009 4:56am

    Although it’s importance may not be obvious to the casual observer, there is one other important provisions in this bill. The bill would require the withdrawal of a HUD rule changing the process for providing consumers with estimates of settlement costs for residential mortgages. The bill would also require HUD to work with the Federal Reserve to ensure that RESPA and Regulation Z rules with respect to these disclosures do not conflict. HUD’s changes to it’s RESPA regulations, which go into effect at the beginning of next year, are considered by many to be too confusing to both lenders and borrowers and are out of sync with similar Regulation Z requirements for loan disclosures.

  • JustinNY 05/08/2009 12:33pm

    The bill “…would ban pay incentives for mortgage brokers to steer borrowers into high-priced loans, require brokers to ensure that borrowers have a “reasonable ability” to repay the loan they are getting…”

    Gee-whiz Paw! Shouldn’t the risk of losing their investment be enough incentive? Heck, I don’t lend money to someone without being sure they can pay me back – that’s just common sense!

    The real “reform” would be if we eliminated the safety net for these lenders. If they make a bad decision, they should lose their money like every other honest business – this is what keeps us honest. If, however, the bank knows it’s protected (by FDIC, etc), guess what it’s gonna do? :) Bingo – “everybody’s pre-approved!!”

    Until we remove these safety nets, everything else is just more regulation, which requires more effort, which costs more money, which burdens the taxpayers even more. That’s not a fix, it’s duct tape and paperclips.

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