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Mortgage mess echoes in Congress

Proposals to revise loan rules and provide more refinancing flexibility await lawmakers when they reconvene today.

September 04, 2007|Jonathan Peterson | Times Staff Writer

WASHINGTON — As mortgage-related turmoil weighs down the U.S. economy, members of Congress are considering a range of measures aimed at easing the current problems while preventing such a crisis from recurring in the future.

Lawmakers are pushing regulators to police the mortgage business more vigilantly. They are preparing legislation that would overhaul standards for all home loans, imposing new regulation on brokers, independent lenders and investors who purchase mortgage-related securities.

And they are urging a broader role for the giant, federally chartered mortgage finance companies -- Fannie Mae and Freddie Mac -- in helping refinance delinquent mortgages.

The political realities were dramatized last week when President Bush, who has not encouraged an activist federal response to the mortgage crisis, called for a series of measures to stem mortgage defaults and help people hold on to their homes.

Bush's proposal included a new program that would help once-creditworthy borrowers refinance their adjustable-rate mortgages, even if they were already in default. The loans would be insured by the Federal Housing Administration.

Members of Congress, who return today from their August recess, will be pushing their own agenda for change.

"The mortgage crisis is going to get worse -- and until the mortgage crisis is solved, the credit crisis will not be over," said Sen. Charles E. Schumer (D-N.Y.), reflecting the rising level of concern on Capitol Hill.

Lenders warn that a government overreaction to problems in the mortgage industry could backfire, drying up credit at a time when it is sorely needed and putting loans out of the reach of worthy borrowers.

"The Hobson's choice here is that if we go too far in passing rules to protect people in the mortgage market we could end up denying them access to credit," cautioned Kurt Pfotenhauer, senior vice president of government affairs for the Mortgage Bankers Assn.

Lawmakers will consider three aspects of the mortgage-related mess:

* The credit crunch. A sharp decline in capital available for investors is jeopardizing economic growth. The Federal Reserve has tried to ease concerns by making cash more available, but some lawmakers believe the response is not sufficient. They want Fannie Mae and Freddie Mac to inject billions of dollars into the marketplace.

* Predatory lending. Rep. Barney Frank (D-Mass.) will soon introduce a bill mandating a range of borrower protections. The bill would place mortgage brokers under the supervision of federal regulators and hold investors in mortgage-backed securities partially responsible for problems that may arise with loans they own.

* Soaring home foreclosures. Foreclosures in California surged to a record 17,408 for the three months that ended June 30, up nearly 800% over the same period last year. A more modest proposal by Schumer to give housing advocates $100 million to counsel troubled borrowers and help them avoid foreclosure is contained in an appropriations bill the Senate will consider soon.

Supporters of government oversight will point to turmoil in the credit markets as a reason to bolster regulation of the mortgage industry.

"I don't think I'm going to hear for the next couple of months 'If it ain't broke, don't fix it,' " Frank quipped in an interview.

The Massachusetts Democrat, chairman of the House Committee on Financial Services, aims to introduce anti-predatory lending legislation this month.

His bill would mandate higher standards for all lenders, including independent firms that have not traditionally been regulated by the federal government. It also is expected to assign some responsibility to the holders of mortgage-backed securities if they are owners of improper loans, and also propose a nationwide database with information about lender misconduct.

Pfotenhauer said the Mortgage Bankers Assn. supported the goal of uniform national standards in lending. But he declined to comment on Frank's bill, which has not yet been unveiled, and he opposed the idea of holding investors responsible for problems with mortgages they may hold as part of securities.

Another potentially controversial proposal would be to combat the credit crunch by expanding the dollar limit on mortgage portfolios held by Fannie Mae and Freddie Mac, the big institutions that purchase mortgages from lenders. Currently, their holdings are restricted to about $700 billion each.

Federal Reserve officials have argued that too big a role for such firms can jeopardize the safety and soundness of the housing market. (The caps were put in place by U.S. regulators to address concerns about the companies' bookkeeping practices.)

Given the opposition, it is not clear whether these caps will be eased. But proponents say the effect could be powerful, potentially infusing the mortgage finance system with billions of dollars and thereby enabling many borrowers to refinance their debt at affordable interest rates.

"Fannie and Freddie will be front and center when Congress returns," said Howard Glaser, a mortgage industry consultant and former U.S. housing official. Easing the caps "could make a significant impact on the sub-prime problems," he said. "No question about it."

As some see it, Congress faces growing pressure to approve at least some changes, given the volatility of the financial problems and the emotional toll on families facing foreclosure.

"It will be very difficult to go back to voters next year and explain that you voted to continue the status quo in the mortgage market," said Michael D. Calhoun, president of the Center for Responsible Lending, a pro-consumer research group based in Durham, N.C.


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