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Mortgage Morass: Subprime Market Needs More Rules, Consumer Advocates Say

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By Ruth Mantell

RISMEDIA, June 29, 2007?(MarketWatch)?Greater regulation is needed to ensure that America’s most vulnerable home-loan borrowers are protected from unscrupulous lenders as well as confusing and pricey mortgages, consumer advocates said Tuesday.

“We have a regulatory failure here on a level that is frankly putting the economy at risk,” said David Berenbaum, executive vice president of the National Community Reinvestment Coalition, at a Senate banking subcommittee hearing.

Consumer groups at the hearing spoke in favor of the proposed Borrower’s Protection Act of 2007. The act would increase protections for subprime borrowers — typically those with lower incomes or blemished credit histories — with new regulations and requirements for various mortgage originators.

“It’s clear that the subprime market has been the Wild West of the mortgage industry for far too long,” said Sen. Charles Schumer, D-N.Y., a co-sponsor of the proposed legislation.

The bill would create more responsibility for mortgage brokers, prohibit originators from steering consumers to loans that are not “reasonably advantageous” and make lenders liable for mortgage brokers’ omissions in connection with more-expensive loans that could end up in higher fees, among other acts.

Subprime borrowers have been steered toward loans that are needlessly expensive so that brokers and others can reap higher profits, critics claim. In particular, adjustable-rate mortgages can end up costing much more than borrowers anticipate when the loans reset from an initial “teaser” rate.

In the first quarter of this year, the delinquency rate (on a seasonally adjusted basis) for subprime adjustable-rate mortgages rose to 15.75% from 14.44% in the prior quarter, according to a June survey from the Mortgage Bankers Association. The Center for Responsible Lending estimates that one out of five subprime loans issued during 2005 and 2006 will fail due in part to adjustable-rate mortgages.

Tread lightly, industry says

Industry participants say it’s important for lawmakers and regulators to tread lightly.

“The challenge for policymakers is to balance the need to assure consumer protections against the need to assure the availability of credit,” said John Robbins, chairman of the Mortgage Bankers Association.

The Federal Reserve has acknowledged that additional measures may be required to combat bad lending practices, but the regulator wants to avoid curtailing responsible subprime lending or beneficial financing options.

Robbins said there are three things that government can do to help protect consumers:

Make financial education a priority
Simplify the mortgage process and increase transparency about the functions and fees of key professionals
Create a uniform national standard for mortgage lending with more accountability for professionals

Appraisers have been faulted for inflating home values and adding to mortgage woes.

Alan Hummel, chairman of the government relations committee of the Appraisal Institute, a trade group, struck back and said appraisers have been coerced by brokers. The Appraisal Institute endorses the proposed legislation.

“When appraisals are delivered, appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again,” Hummel said.

Appraisers under pressure

Hummel cited a study by October Research Corp. finding that 90% of appraisers have been pressured by mortgage brokers, lenders and others to raise property valuations to support deals. Appraisals that are too high can end up hurting borrowers who are already in trouble when they go to sell their homes or refinance and find out that the house isn’t worth what they paid for it.

Pat Combs, president of the National Association of Realtors, said loans for those with less than perfect credit “should only be made when it is clear that the borrower can afford to repay it.”

Combs said NAR supports stronger underwriting standards, stronger penalties for abusive acts and strengthening the independence of home appraisers.

Denise Leonard, a board member of National Association of Mortgage Brokers, said the industry group urges Congress to adopt uniform national standards for education, testing and criminal background checks for all mortgage originators, and creating a national registry that would include all originators, such as banks, lenders and brokerages. The group at its recent convention in Seattle called on regulators to stop singling out mortgage brokers.

The Borrower’s Protection Act would also:

Require mortgage originators to verify borrowers’ reasonable ability to pay the principal and interest, real estate taxes, and other fees associated with a loan
Prohibit mortgage originators from entering into a loan when the originator has reason to believe that the appraiser of the property securing the loan failed to act in good faith and fair dealing in its appraisal
Prohibit a mortgage originator from seeking to influence an appraiser or encouraging a targeted value

Ruth Mantell is a MarketWatch reporter based in Washington.

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