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Massive Resistance to Mortgage Reform

November 7, 2007 - by Donny Shaw

Congress is taking its first steps towards responding to the mortgage market meltdown that is threatening to throw us into a recession, but the mortgage industry and Blue Dog Democrats are putting up a tough fight to stop it.

H.R.3915, Mortgage Reform and Anti-Predatory Lending Act of 2007, was voted favorably out of the House Financial Services Committee on Monday and is expected to make it to the floor of the full House later this week. Unlike some other bills pending in Congress right now, this one isn’t an attempt to repair the current crisis. It’s designed to make changes to the system to prevent similar crisises from occurring in the future.

According to the democratic staff on the Committee, the bill would “create a licensing system for residential mortgage loan originators, establish a minimum standard requiring that borrowers have a reasonable ability to repay a loan, and will attach a limited liability to secondary market securitizers,” among other things.

Another important provision would allow courts to restructure mortgages for homeowners that have been forced to declare bankruptcy because the value of their home has dropped below the amount of debt they took on with their mortgage.

This bill has been getting a lot of buzz in the blogs, mostly from mortgage industry bloggers and mostly negative. In general the industry sees it as implementing undue regulations that could damage the free market’s ability to enforce responsibility on the behalf of borrowers. “Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition,” Brian Brady writes on the Blood Hound Blog. If you look through the blog coverage that’s rolling in on OpenCongress, you’ll see a lot of similar arguments.

The Blue Dog Coalition of moderate and conservative Democrats, who pride themselves on forging policy middle-grounds, have come out against the bill because they fear it could stand in the way of implementing the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that they helped pass in 2005. “A goal shared by Blue Dog supporters of BAPCPA is ensuring that those with the ability to pay back at least some of their debts do so, while preserving access to the bankruptcy system. Unfortunately, those who abuse the bankruptcy system end up penalizing other Americans who choose to work hard and pay their debts, and who still find it a challenge to obtain credit,” they wrote in a letter to the committee chairmen who have been working on moving the legislation forward.

Besides the blog and news coverage that OpenCongress has been gathering on this bill, the two big New York papers have published competing editorials that are required reading for understanding the issues raised by this bill:

The New York Times: Putting an End to Abusive Lending

The Wall Street Journal: A Sarbox for Housing

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Comments

  • Anonymous 11/12/2007 9:01am

    I didn’t see any language about restructuring the mortgage if the value of your property fell and you are about to be foreclosed on, however if true, it would become the most dangerous part of the bill.

    If we have two borrowers and one is helped because they are in trouble and the other one isn’t because they are not, you would have millions of borrowers screaming bloody murder. You cannot drop rates in a wholesale manner for those that have difficulties, because then everyone that isn’t in trouble will want the same deal and frankly even better.

    This bill doesn’t put an end to abusive practices it perpetuates them. The main reason there are abusive practices is because there is a mountain of paperwork to sign. It is easy to hide something sinister when it is buried in hundreds of useless papers. This bill will add another hundred useless pieces of paper to the already hundred useless pieces of paper.

    If you want a real analysis of this bill from someone that actually understands the industry then read this…

    www.proprietornation.blogspot.com/2007/11/parsing-language-on-hr-3915.html

  • Anonymous 11/12/2007 11:34am

    Thanks for the comment and link, Mike. This bill would change the law to allow bankruptcy courts to modify mortgages on primary residences. Currently the law only allows the courts to modify mortgages on vacation homes, family farms and investment properties. Check out this article form the Politico — it not only explains this provision of the bill, but also discusses some of the favorable lobbying from hedge funds and investment firms that the bill is getting. Also, this post at OpenLeft has a couple links to testimonies given to House committees in favor of the bankruptcy changes in the bill.

  • Anonymous 11/12/2007 2:15pm

    I don’t recall that “quote” you attributed to me. Could you be paraphrasing two different ideas I made and trying to connect them?.

    Please correct that.

    I am against HR 3915 but not for protectionist reasons. I have no interest in “saving” and insustry, just an interest in consumers’ access to ready residential real estate capital.

  • Anonymous 11/12/2007 8:40pm

    Brian, I pulled that quote from the article of yours I link to above, entitled, “”http://www.bloodhoundrealty.com/BloodhoundBlog/?p=2112">HR 3915 Is Dangerous." Here it is in the context that you originally wrote it:

    “This bill will provide a false sense of security to the consumer and encourage even more irresponsible behavior. Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition. The scoundrels will fleece the ignorant under the protective cloak of a highly regulated industry- it happens on Wall Street daily.”

    If you meant something other than how I interpreted it above, please let me know.

  • Anonymous 11/14/2007 6:37pm

    I stand corrected, Donny.

    Stuff looks different when parsed. I, in no way whatsover, am against this bill because mortgage brokers will take a hit.

    I am against this bill because the consumer will have limited options.

    Thanks for addressing it and I apologize for my suspicious nature; I’ve had to re-explain my positions and the legislative process 3-4 times.

    Nice article.

  • Anonymous 11/14/2007 6:38pm

    I stand corrected, Donny.

    Stuff looks different when parsed. I, in no way whatsover, am against this bill because mortgage brokers will take a hit.

    I am against this bill because the consumer will have limited options.

    Thanks for addressing it and I apologize for my suspicious nature; I’ve had to re-explain my positions and the legislative process 3-4 times.

    Nice article.

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