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Mortgage Rules Can Be Tightened Without Asking Bankers To Spy

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The Tampa Tribune

Published: November 23, 2007

Lax lending rules have contributed to the trouble in the real estate market that is rattling the entire economy, especially here in Florida.

Speculators paying little or nothing down drove up home prices and lenders who should have known better went along for the ride. And then the bottom fell out.

The overheated market's self-inflicted wounds need attention, but the treatment offered in a recent bill passed by the U.S. House is the wrong medicine. It offers some protections for future homebuyers, but would make it harder if not impossible for someone with imperfect credit to afford a modest home.

Congress, or the Federal Reserve, can do better. But action is needed. The market cannot be trusted to fix itself. Homeownership is too big a part of the nation's economy and a family's quality of life to be to left to the reckless creativity of lenders when boom times return.

The goals of reform should be to prohibit confusing lending terms, sneaky fees, bait-and-switch tactics and other deceptive practices. The current bill goes too far in trying to stop all risky loans.

The new requirement would force the lender to make sure the borrower "has a reasonable ability to repay." If the borrower can't reasonably repay, then the borrower can sue the loan provider.

That language could raise the price of loans, depending on how the courts define "reasonable." Consider that only a few events lead to the vast majority of foreclosures, says Ritch Workman, president of the Florida Association of Mortgage Brokers. They are long illness, divorce, a spouse's death and job loss.

Requiring banks to guarantee a homebuyer can make payments "could require a massive invasion of a borrower's privacy," warns the Heritage Foundation, a conservative think tank. Theoretically, it could mean having to complete a medical exam, submit to an interview by a marriage counselor or have your boss interviewed.

One abuse the bill addresses is the relatively new practice of giving mortgages to people who can't prove they have a steady income. That risky conduct can be stopped without, as Heritage put it, deputizing the mortgage industry as a quality-of-life police force.

The Federal Reserve has announced it will soon consider tightening lending rules in areas it oversees. If it forbids shortcuts such as neglecting to set up an escrow account for taxes, it will help borrowers stay out of financial trouble.

Another problem surfacing is how mortgages are packaged and resold to Wall Street investors. Typically, neighborhood banks and mortgage companies will renegotiate the terms of a loan to help keep people in their homes and making payments. It's to everyone's advantage to avoid the high legal costs of foreclosure. But when your mortgage is sold to a hedge fund, the mortgage loses its human face. Negotiation can become impossible.

The fed should investigate how to keep mortgages from being removed from the control of real live loan agents. The money pouring in from nameless, distant investors helped keep rates low, but accountability and flexibility suffered.

No matter where the mortgage money comes from, major risks will stay here at home. That's where the responsible decision-makers should be for a home to be properly valued and the repercussions of its loss to be fully appreciated.

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