House Democrats have introduced legislation that supporters say would remove incentives for mortgage brokers to place borrowers in higher-cost loans, and require lenders to retain some exposure to riskier loans that are securitized and sold to secondary-market investors.
HR 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009, is a sweeping bill that would address many other aspects of the loan origination, securitization and servicing process, including the creation of a "federal duty of care" for all mortgage originators, prohibitions on certain prepayment penalties, and protections for tenants of foreclosed homes.
Among the provisions likely to generate the most controversy is language that would prohibit mortgage originators from receiving yield-spread premiums or other compensation that critics say serve as incentives for them to steer borrowers into more costly loans.
Proponents of yield-spread premiums — rebates paid by lenders when borrowers take out loans at higher interest rates than they might otherwise qualify for — say they can help homebuyers finance closing costs.
Critics say mortgage brokers often place consumers into loans with high interest rates, then pocket the rebates without the borrowers’ knowledge.
As introduced, HR 1728 would allow borrowers to finance origination fees and costs into their loan, as long as they are disclosed early in the application process. But the total compensation paid to the loan originator could not vary based on the terms of the loan — other than the size of the loan itself.
New rules governing the enforcement of the Real Estate Settlement Procedures Act (RESPA) being phased in this year treat yield-spread premiums in a similar fashion, requiring that the rebates be credited against a borrower’s closing costs.
The National Association of Mortgage Brokers (NAMB) has sued the Department of Housing and Urban Development to block implementation of that aspect of the rule change (see story).
Supporters say HR 1728 is a tougher version of HR 3915, a bill that passed the House in 2007 but which was opposed by the Bush administration and the lending industry and was never taken up in the Senate.
During the debate over HR 3915, Rep. Tom Feeney, R-Fla., called the bill "the landlords and lawyers relief act," warning that it would make lenders and the investors who back them more liable to lawsuits, and therefore make it harder for renters to become homebuyers (see story). …CONTINUED
Although NAMB and other groups are also expected to take issue with many aspects of HR 1728, the sponsor of both bills, Rep. Brad Miller, D-N.C., says the political climate has changed.
The foreclosure crisis has "wreaked havoc" on the economy, Miller said in a statement, and "the industry’s arguments for watering the bill down are not at all convincing."
The bill, scheduled to be marked up by the House Financial Services Committee Tuesday, would lower the trigger for loans to be considered "high cost" and therefore subject to the more stringent requirements of the Home Ownership and Equity Protection Act, or HOEPA. Lenders say loans subject to HOEPA can be more difficult, if not impossible, to securitize and sell to secondary-market investors.
In addition, lenders making higher-cost and subprime loans would be required to establish escrow accounts and collect payments for property taxes and insurance unless borrowers agreed to waive the requirement.
The bill would update RESPA to limit loan servicers’ ability to impose force-placed hazard insurance, mandate swifter responses to written inquiries from consumers, increase penalties for abuses, and require the prompt crediting of payments.
HR 1728 would also strengthen appraiser licensing and education standards, establish stronger federal standards with tough penalties, and create a federal grant program to help states regulate appraisers.
Mortgage securitizations
To ensure that lenders have some "skin in the game," HR 1728 would require them to retain at least 5 percent of the credit risk of nontraditional loans they securitize and sell. Nontraditional loans include mortgages with negative amortization or interest-only features. The bill would bar lenders from directly or indirectly hedging or transferring that risk to others.
Proponents of such measures argue that the securitization of mortgages and other debt into complex investments like collateralized debt obligations (CDOs) — and the hedging of risk by investors through unregulated instruments such as credit default swaps (CDS) — contributed to the credit crunch and global financial meltdown.
Loan originators and lenders who provided interim funding for loans before selling them in the secondary market were insulated from risk, critics say, which led to a reckless loosening of underwriting standards. Investors continued to pump money into mortgage lending because securities backed by property had traditionally been seen as safe investments. …CONTINUED
The flow of global investment capital into mortgage lending artificially inflated housing prices, critics say. When the housing boom went bust, many borrowers defaulted on their loans, and the property serving as collateral for mortgage-backed securities (MBS) and CDOs was worth less than investors had assumed.
HR 1728 would attempt to address that issue in another way, by making mortgage securitizers — who package home loans into securities — more liable for fraudulent loans. The bill’s language on "assignee liability" would give consumers the ability to sue mortgage securitizers for rescission of their loan if they could prove its terms violated the bill’s standards for loan originators.
The bill’s standards for loan originators include requirements that they determine a borrower’s ability to repay a loan and only refinance mortgages when there is a "net tangible benefit" to the consumer.
Although the secondary market for mortgages not backed by Fannie Mae, Freddie Mac or Federal Housing Administration guarantee programs all but evaporated in late 2007, many in the real estate and lending industries remain hopeful it can be resurrected.
Because lenders must generally keep them on their books rather than securitize and sell them to investors, "jumbo" loans too large for purchase or guarantee by Fannie and Freddie and subprime loans that don’t meet their underwriting standards have become pricier or unavailable to many borrowers.
Opponents of measures like those proposed in HR 1728 say imposing too many requirements or creating too much risk for loan originators and securitizers will impede or prevent the restoration of a secondary market for "private label" mortgage-backed securities that don’t have the backing of Fannie, Freddie or FHA.
The bill attempts to address such concerns by giving securitizers who are sued by borrowers 90 days to rework a loan so that it conforms to minimum standards, and by prohibiting class-action lawsuits by groups of borrowers. Also, investors in securities holding the loans in pools would not be liable.
The legislation would also create a limited "safe harbor" for "qualified mortgages" — prime, fully documented 30-year fixed-rate mortgages that have no negative amortization or interest-only features. Those loans would be presumed to meet the ability to repay and net-tangible-benefit standards, and be exempt from some of the bill’s requirements.
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