RISMEDIA, April 27, 2009-To help Americans continue to achieve their dreams of homeownership, there must be a balance between safeguarding consumers in the lending process and ensuring reasonable access to mortgage capital. That is the message that the National Association of Realtors® (NAR) delivered to Congress last week, reiterating its support of comprehensive legislation to reform mortgage lending.
At a House Financial Services Committee hearing, NAR President Charles McMillan testified that reform to the mortgage lending system is needed to restore consumer confidence in the economy and the housing market. “Historically low mortgage rates and a significant tax credit for first-time home buyers have begun to bring people back to the housing market. However, we need wholesale reform of the mortgage lending sector to give consumers the protection they need and the confidence necessary to expedite the housing recovery,” said McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth.
While lower income and less educated homeowners have tended to be the most frequent direct victims of predatory lending, the foreclosure crisis that has resulted has had terrible consequences for all American homeowners. Even though the majority of homeowners have never had anything other than a 30 year fixed rate mortgage, virtually all homeowners have lost substantial equity in their homes as a result of the economic downturn, which was precipitated by predatory mortgage lending practices. For most homeowners the equity in their home is their single largest source of savings and contributor to their net worth.
Many homeowners hold securities in mortgage lending institutions, either directly or as components of their mutual funds, in their investment accounts and/or IRA’s, 401Ks, or other retirement savings vehicles. Those homeowners had expected that the CEO’s of those lending institutions would be using prudent financial management practices consistent with the protection of their assets.
Instead, American homeowners learned that those companies essentially abandoned sound underwriting principles. They qualified borrowers based only on their ability to pay initial “teaser” interest rates which only two or three years later were almost certain to rise substantially based on the their reset formulations. They lent out their stockholders’ money without verifying the borrower’s income. As a result of this gross mismanagement, millions of American homeowners will have to defer their retirement, and many of them will never be able to afford to retire.
The recently introduced Mortgage Reform and Anti-Predatory Lending Act of 2009, H.R. 1728, contains many of the reforms NAR has been seeking, but McMillan cautioned against overregulation. “We must strike an appropriate balance between safeguarding consumers and making sure they have access to mortgages at a reasonable cost. Undue regulation of the mortgage market could be as harmful to consumers as the lack of regulation that led to irresponsible lending and other abuses,” McMillan said. “We must be sure there are no unintended consequences here.”
It is critical to take steps that will prevent a recurrence of predatory lending, and members of The American Homeowners Grassroots Alliance believe that all the provisions in H.R. 1728 will contribute to that goal. A number of the provisions of the bill are particularly important. Among them are the creation of a federal 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 and for which (s)he receives a net tangible benefit and that do not have predatory characteristics, making full disclosures to consumers, and assuring that lenders comply with mortgage origination requirements.
NAR believes the current definition of mortgage originator as “any person who assists a consumer in obtaining or applying to obtain a residential mortgage loan” is too broad, since Realtors®, as part of their normal level of service provide advice, counsel and assistance across all aspects of the real estate transaction. In addition, NAR supports the safe harbor provisions in the legislation, but as written, these provisions may be too narrow.
“The safe harbor should include more products than 30-year fixed-rate mortgages. We need to protect more home buyers from risky lending products, and that requires some flexibility in financing terms,” McMillan said.
NAR supports regulations that require lenders that make subprime mortgage loans to establish appropriate escrow accounts. Borrowers making at least a 20% downpayment should have the option to budget for these payments independently.
NAR also believes that a strong and independent appraisal industry is vital to restoring faith in the mortgage origination process. “H.R. 1728 strikes a good balance by strengthening the accountability and oversight of appraisers while creating new consumer protections,” said McMillan.
“We applaud the efforts of this committee and the authors of H.R. 1728. This bill is a major step in the right direction and we look forward to working with Congress to adjust and improve the legislation to make it even more meaningful and safe for all consumers,” McMillan said.