Realty Check

Lending Reform: Let The Battle Begin!


You may or may not have heard, Rep. Barney Frank (D-MA), the chairman of the House Financial Services Committee, announced his legislation for mortgage lending reform today. This is expected to be the bill that will or will not change the way the mortgage business does business.

The 66-page bill (much like your mortgage) is designed to “diminish predatory lending while continuing to support a rigorous mortgage market.” That’s what Frank said on a conference call this morning, although he didn’t actually have a copy of the bill with him, nor did I have a copy of it in front of me. That came later.

The bill prohibits financial incentives for brokers and bankers to steer borrowers toward more expensive loans. It also prohibits prepayment penalties on subprime loans and limits prepayment penalties on prime loans. The penalties would actually have to expire three months before an interest rate on an adjustable rate mortgage would reset.

The bill also makes securitizers responsible for bad loans; yup, that’s you Wall St. Not totally responsible, of course, but there would be “assignee liability” to ensure that folks like Bear Stearns and the like are really making sure those new underwriting standards are enforced. The idea is that borrowers should not be given loans they can’t afford (did we need a law for that?? Guess so.)

Reaction? Mixed. The Fed Chairman, Ben Bernanke, has given a thumbs up in the past to limited assignee liability, but the Treasury Secretary, Hank Paulson has expressed concern that this would make investors slightly skittish. The issue among banking groups has to do with the fact that the bill leaves a lot of this stuff up to the states.

The Mortgage Bankers Association is looking for a more uniform national standard. "That will go a long way toward getting rid of confusion in the mortgage market place. It's a national mortgage market. Most of the funding comes out of the GSE's or Wall Street. Without that, the bill is a non-starter for the industry," Kurt Pfotenhauer or the MBA told me.

He also said the bill is extremely complex and "the possibility of unintended consequence is high." He'll be testifying at Chairman Frank's hearing on the issue Wednesday, so stay tuned.

Questions?  Comments?