Loan reform? All in good time

WASHINGTON -- Thousands of Americans may be losing their homes to foreclosure or facing hefty mortgage payment resets, but Congress appears to be in no rush to offer help.

While the House has passed several major housing relief measures in recent weeks, the Senate hasn’t managed to pass even one. On the eve of the two-week Thanksgiving recess, the House approved by a bipartisan vote the most sweeping reforms of the national mortgage system in more than two decades.

Meanwhile, the Senate stalled legislation that would strengthen the Federal Housing Administration’s mortgage programs -- a key resource for consumers who need to refinance out of adjustable-rate loans with rapidly escalating monthly payments into affordable fixed-rate mortgages.

The FHA reform bill passed the House in September and had been approved by the Senate Banking Committee by a 20-1 vote. But it was blocked from floor action by a small group of Republicans who are not sympathetic to vigorous federal involvement in the mortgage market, even if it’s designed to assist borrowers ravaged by private-sector sub-prime lenders.

The FHA bill is particularly important for high-cost housing markets around the country -- California and parts of the East Coast, in particular -- because it raises the maximum mortgage amounts the agency can insure. It also would reduce down payments and allow the FHA to charge lower premiums to applicants with better credit histories and higher premiums to borrowers with less favorable credit backgrounds.

The bill was blocked from a floor vote Nov. 15 by Sens. Tom Coburn (R-Okla.) and Jim DeMint (R-S.C.), following a hold placed on it by Elizabeth Dole (R-N.C.). Dole objects to the FHA’s plan to price mortgages based on credit risk. Dole is an ally of the private mortgage insurance industry, which would have to compete with a revived FHA in the low-down-payment segment of the mortgage market.

Coburn and DeMint argued that the FHA reform proposal was too far-reaching to be rushed through the Senate before the Thanksgiving break without a potentially lengthy floor debate.

The House-passed mortgage reform bill may well face a similar uncertain fate in the Senate. Among other provisions:

* It would require every loan originator in the country to be registered and licensed in a national database, and to meet minimum educational and certification standards.

* It would require all originators to make only loans whose terms are “appropriate” to the borrower. For example, the borrower must have a “reasonable” ability to repay the mortgage and must receive a “net tangible benefit” from the loan in the case of a refinancing.

* It would ban and punish “steering” borrowers into higher-cost mortgages than their credit histories merit. This problem has been prevalent in home loans made to first-time and minority applicants, who often have minimal or “thin” national credit bureau files but solid payment histories on rents, utility bills and other forms of credit that are not reported to the bureaus. Some loan officers steer minority applicants into inappropriately higher-cost mortgages solely to reap higher fees, according to consumer advocates.

* It would extend legal liability for toxic and predatory loans to Wall Street firms that securitize pools of mortgages into bonds. Under current rules, those companies are often insulated from suits over predatory loans, even though they may have been aware that borrowers have been abused.

* It would clean up the appraisal field by prohibiting and punishing interference in valuations, especially brokers and lenders who pressure appraisers to “hit the number” needed to allow loans to close.

Banking and mortgage lobbyists have sought unsuccessfully to remove or soften some of the bill’s reforms before the House vote but are in a position to block the legislation outright in the Senate. Banking Committee Chairman Chris Dodd (D-Conn.), who is campaigning for his party’s presidential nomination, had promised his own mortgage reform bill to focus support in the Senate but to date has introduced nothing.

The majority of members of both the House and the Senate would probably agree that the American mortgage system broke down between 2001 and 2005, allowing lax underwriting, bogus appraisals and fraud to trigger billions of dollars of losses and hundreds of thousands of foreclosures.

But when it comes to how and when to fix the system, the key lies with the Senate, which appears to be in no rush.

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Comments for Kenneth R. Harney can be sent to kenharney@earthlink.net.