The legislation currently before both houses of the U.S. Congress is intended to be a major overhaul of the financial industry, but it also includes some important new restrictions for the mortgage lending market, often blamed for the downfall of the U.S. economy in 2006.
“It would have been unthinkable to get through financial reform without addressing the mortgage market because this is why were are in the mess we’re in,” said Julia Gordon, senior policy counsel at the Center for Responsible Lending, as quoted in a Washington Post article.
While the House and Senate are each considering slightly different proposals, essentially both houses are targeting the mortgage industry in an effort to prevent future, similar meltdowns. For example, both bills aim to limit mortgage broker compensation based on putting borrowers into loans with higher interest rates than they qualify for. Brokers and loan officers would also be prevented from earning extra money from giving people loans with prepayment penalties. In fact, both houses want to make prepayment penalties illegal on certain mortgages like adjustable rate mortgages and subprime loans.
Another idea being floated in the House is to require mortgage lenders to be responsible for at least 5 percent of each loan they make, instead of selling the entire thing off immediately to investors as is now commonly the practice. Washington hopes that retaining a stake in the loans until they are paid off will help lenders make more responsible loans, but the mortgage industry says it could cripple the smaller lending firms and cause the rest to raise their interest rates and make fewer loans. The Senate’s bill would require investors to hold on to some share of the loans, not the lenders.
Both bills, nearing completion, would also require lenders to verify income and assets, completely doing away with so-called “no-doc” or “liar” loans. And for those getting adjustable rate mortgage, lenders would also be legally responsible for making sure borrowers can afford their mortgage payments at the highest rate possible, not just at the low, starter rate.
The interesting thing is that most of these new stipulations are already being practiced by the mortgage industry as a result of financial hit they took after the housing market crashed. They have by and large realized that what they were doing was unsound, but the magnitude of the crisis has been so far reaching that now the industry will have to follow more rules in order to do business.