Landlords and lawyers relief or just good sense?

November 19, 2007

Last Thursday, the U.S. House of Representatives passed the Mortgage Reform and Anti-Predatory Lending Act of 2007 (HR 3915) in a 291-127 vote.  The bill is contentious, with some saying that it’s too strict and others saying that it’s not strict enough. 

Sen. Christopher Dodd, D-Conn., is expected to introduce legislation similar to HR 3915 in the Senate, though it’s not clear whether a Senate bill would include the same controversial measures as the House bill.

President Bush hasn’t said explicitly whether he would veto the bill, but the White House did issue a statement saying that “the Administration has concerns with the bill as drafted because it includes provisions that unduly restrict access to credit for potential homebuyers and reduce refinancing opportunities for current homeowners.”

While the bill could end up reducing the number of people who become homeowners, that might not be a bad thing.  The sad fact is that some people simply can’t afford to own a home.  Those who try to own a home when they can’t really afford it end up defaulting, and their home is sold in foreclosure (which we see happening more and more each day).

According to the bill, its primary purpose is to “amend the Truth in Lending Act to set forth a duty of care standard for residential mortgage loan originations.” RealtyTrac’s blog, ForeclosurePulse.com, provided an excellent overview of HR 3915.  The main provisions of HR 3915, according to ForeclosurePulse.com, are:

• Prohibits steering incentives to mortgage originators, including incentive compensation and any yield spread premium based on, or varying with, the terms of a residential mortgage loan.
• Prohibits mortgage originators from steering any consumer to a residential mortgage loan that is not in the consumer's interest (loans with predatory characteristics).
• Sets forth licensing and registration requirements for mortgage originators.
• Requires creditors to determine, based on verified and documented information, that a consumer has a reasonable ability to repay the loan, according to its terms, and all applicable taxes, insurance, and assessments.
• Prohibits creditors from extending credit for residential mortgage loans that involve refinancing of a prior residential mortgage loan unless the creditor determines that refinancing provides a net tangible benefit to the consumer.
• Sets forth defenses to foreclosure.
• Revises requirements governing prepayment penalties. Prohibits lending without due regard to repayment ability.

Inman News reported that “The House bill’s most contentious restrictions include a ban on incentive payments brokers and loan officers receive when they place borrowers in high-cost loans, and prohibitions on prepayment penalties used to discourage borrowers from refinancing their loans.”

“Rep. Tom Feeney, R-Fla., called HR 3915 ‘the landlords and lawyers relief act,’ because he said it would make it more difficult for renters to become home buyers, and make lenders and the investors who back them more vulnerable to lawsuits.”

But many of the bill’s provisions, including that a lender must “determine, based on verified and documented information, that a consumer has a reasonable ability to repay the loan” seem like no-brainers to me.  A lender making a loan only if the consumer demonstrates a real ability to repay it?  Duh.

Other provisions, such as allowing assignee liability, which is the right of borrowers to sue companies that bundle loans and sell them as investments (called securitization), aren’t as clear-cut in my mind.  The idea is to develop an incentive for securitizers (the companies that bundle mortgage loans and sell them as investments) to pay attention to how loans are originated makes sense.  Whether HR 3915 accomplishes that is up for debate.

One of the reasons that the subprime mortgage meltdown has so many ripple effects throughout the economy is the fact that companies like Citigroup and Merrill Lynch (now in trouble, if you haven’t heard), took loans made under extra-lax lending terms (such as stated income loans for subprime borrowers – yikes!), bundled them, and sold them to investors as top-rated securities.  The investors didn’t know they were investing in risky subprime loans.  But the lenders and securitizing companies didn’t have any incentive to stop shoddy lending and bundling the loans.  With HR 3915, they might.