Industry Players Vie for a Piece of Mortgage Lending Reform

The Financial Institutions Subcommittee on Wednesday conducted a hearing of mortgage industry participants to focus on comprehensive mortgage lending reform legislation the Financial Services Committee is expected to consider later in March. A part of the original H.R. 3915 — the Mortgage Reform and Anti-Predatory Lending Act of 2007 — managed to be signed into law within separate legislation. That one provision, the requirement of a nationwide licensing and registration system for mortgage brokers, has been criticized as not doing enough to reform the system. “The Financial Services Committee continues to take the lead in establishing a national standard to rein in the abusive lending practices that contributed to the current mortgage crisis and our overall economic problems,” said chairman Luis Gutierrez.  “I am disappointed that the White House and the Senate did not share our sense of urgency in 2007 when the House first passed historic mortgage reform legislation.  But I am confident that new leadership in the White House will help us move this year’s version of mortgage lending reform quickly through both chambers and make sure that, as a nation, we never find ourselves in this situation again.” The subcommittee acknowledged the absence of a handful of other provisions that were never passed, including: tougher penalties for originators who “steer” borrowers in to higher-priced loans; requiring mortgage originators to ensure that a borrower has a reasonable ability to repay the loan and, in the case of refinancing, will receive a tangible net benefit from the loan; establishing a national standard for assignee and securitizer liability and providing enhanced consumer protections that will subject Wall Street firms to liability if they buy, sell and securitize loans that consumers cannot repay; and providing protections for renters who are forced to leave foreclosed properties through no fault of their own. It was this assortment of potential requirements and restrictions for which many of the hearing’s participants rallied. Laurence Platt, a partner with K&L Gates, on behalf of the Securities Industry and Financial Markets Association and the American Securitization Forum, plead the the values of H.R. 3915, which passed a House of Representatives vote in November 2007 and was referred to a Senate committee in December 2007. The bill was touted as imposing such restrictions on mortgage lenders as to not be able to make mortgage loans without first making a “reasonable and good faith determination” of the borrower’s ability to pay to mortgage, property tax, insurance and the like, based on verified and documented information. The bill also boasted of restricting mortgage lenders from making mortgage loans for the purpose of refinancing on existing loan unless first determining the refinanced mortgage’s “net tangible benefit” to the borrower, according to Platt. Joe Robson, chairman of the board for the National Association of Home Builders and a Tulsa, Okla.-based builder and developer, argued that the mortgage products and practices responsible for the housing crisis have already been edged out of the mortgage lending space and are no longer a major threat, now that lending practices have changed to adapt to stricter scrutiny. “The housing market, the financial system and the economy’s performance continue to reel from the impacts of the mortgage market excesses of earlier this decade,” Robson said. “While the nation will continue to suffer these consequences in the months ahead, the mortgage system itself has already undergone radical reform and change.” Despite the progress Robson said has already taken place, he said in his testimony that the NAHB calls for underwriting standards based on documented credit, income and proven ability to pay rather than expected home price inclines. He warned against “overly rigid adherence to loan-to-value limits” that lead to the rejection of creditworthy borrowers, and urged Congress to “implement a clear national framework for mortgage origination standards to replace the current patchwork of state and local laws, which often lead unnecessary restrictions on mortgage credit.” Margot Saunders fro the National Association of Consumer Advocates, advised implementing a broker payment system similar to insurance brokers who receive commission only when the consumer is making current payments, thereby incentivizing the broker to provide a quality product to a qualified borrower. Overall, the participants that offered testimony in the hearing consistently urged the ban of unsuitable mortgage products, prepayment penalties and any no-documentation approaches to underwriting that originally led to the housing crisis. Jim Amorin, president of the Appraisal Institute and vice president of Austin, Texas-based Atrium Real Estate Services, urged reform of the Home Valuation Code of Conduct, scheduled to go into effect May 1, which opens the door for “appraisal management companies” as a form of regulating an appraisal system that has been criticized as contributing to the upward pressure of house prices in the height of the housing bubble. “With many AMCs taking as much as 60 percent of the fee as their  ‘management’ cost, many highly qualified appraisers are reluctant to perform mortgage appraisals for such entities. This flight of highly qualified appraisers is the last thing an already ailing mortgage market needs.” According to Amiron, the provision for AMCs not only does little to help the situation, but allows for the same potential pressure on appraisers to provide “predetermined values.” “We must return to the fundamentals of mortgage lending: capacity to repay, credit history soundness and collateral,” Amorin said. “Today, even in the midst of our current economic crisis, inadequate attention is paid to the collateral held in support of a loan. This oversight, combined with loose credit policies and a lack of universal and enforceable underwriting guidelines, produced economic disaster. We no longer can continue to ignore these fundamental basics.” In returning to basics, Amorin urged improvements to H.R. 3915 — or passage of similar legislation — that will take more consideration for (surprise!) appraisers. He called for the establishment of a high-level position for collateral valuation review (appraisal czar, anyone?), and asked for an immediate review of loan modification guidelines inherent in the Home Affordable Modification plan, to ensure the protection of consumers and neighborhoods, as well as the utilization of “proper valuation.” David Kittle, chairman of the Mortgage Bankers Association, asked the committee not to forget to pay “special attention” to mortgage lenders (who else?) amidst a movement for reform in consumer protection, systemic risk and safety. For more on the hearing, visit www.house.gov. Write to Diana Golobay at [email protected].