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Congress Called Upon to Reform Mortgage Market and Prevent Future Meltdowns

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RISMEDIA, May 6, 2009-In testimony submitted to the U.S. House of Representatives on April 23, the American Homeowners Grassroots Alliance (AHGA) urged Congress to take steps to reform the mortgage market and prevent future meltdowns. The House Financial Services Committee hearing followed a similar hearing earlier in the week by the House Joint Economic Committee.

In the earlier hearing, Columbia University Professor, and 2001 Nobel Prize recipient, Joseph Stiglitz recommended that the government break the behemoth financial firms into smaller, more transparent companies. Massachusetts Institute of Technology Professor Simon Johnson urged that our antitrust laws be overhauled to prevent the future development of financial firms that are too large, and also urged that the existing very large financial services companies be broken up. AHGA also believes that the biggest financial service organizations may well have gotten so large that they are at the point that any benefits of their economies of scale are more than offset by their bureaucratic inefficiencies, and the potential drastic impact of their failure on the U.S. and the world economy.

AHGA commended House Financial Services Committee Chairman Barney Frank, Representative Brad Miller, and Representative Mel Watt for sponsoring H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act of 2009. The legislation would create a federal mortgage originator “duty of care” that requires licensing and registration, as applicable under state or federal law, presenting consumers with appropriate mortgage loans (i.e., loans that a consumer has a reasonable ability to repay, which have a tangible benefit, and that do not have predatory characteristics), making full disclosures to consumers, and assuring that lenders comply with mortgage origination requirements. It would establish minimum professional standards for entrance into the mortgage origination profession, strong sanctions for violation of the duty of care, and independent determination of fault.

Since many real estate agents and real estate brokers have also been accomplices to the predatory lending process, “duty of care” requirements should be expanded to create a parallel minimum professional standard for entrance into the real estate services profession, strong sanctions for violation of the fiduciary duty of real estate brokers and agents, and independent determination of fault. Currently, minimum professional standards in that sector are too low, fiduciary duty to their clients is often ignored or undermined by industry rules, and regulatory capture usually characterizes the rulemaking and standards enforcement in that field.

The legislation establishes a “safe harbor” for qualified mortgages (which should include FHA, VA, rural housing and mortgages purchased by Fannie Mae and Freddie Mac). It serves the useful purpose of providing lenders reasonable guidelines they can rely on in carrying out those guidelines without fear of being second guessed. AHGA also supported additional standards and requirements designed to protect consumers, including mandating the availability of mortgages without prepayment penalties in each loan category. A lender would be allowed to offer a 30 year fixed rate mortgage with a prepayment penalty, for example, but they would also have to offer a 30 year fixed rate mortgage that had no such penalty, although the interest rate could be different.

In addition, lenders would have to provide advance notice of alternatives for holders of adjustable rate mortgages, prohibiting mandatory arbitration, requiring specific disclosures for loans that include negative amortization features, and prohibiting the creditor from directly or indirectly financing single-premium credit insurance in connection with a consumer mortgage loan. Steps to make appraisals more independent are included in the legislation, additional consumer counseling services would also be made available.

On April 29, the Committee approved the bill. It will next be considered on the floor of the House of Representatives. If passed, the Senate will also have to approve it or a similar bill and work out differences, if any, between the two. The Obama Administration has already indicated its support for the measure.

Courtesy of the American Homeowners Foundation and the American Homeowners Grassroots Alliance.

For more information, visit www.AmericanHomeowners.org.

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