Within the bill (H.R. 3915: Mortgage Reform and Anti-Predatory Lending Act of 2007) that appears headed for a lot of negotiation and work if it has a chance of being passed, the US House of Representatives is trying to prevent another mortgage and credit problem in the future by dealing with loose and deceptive loan practices.

One of the concerns with the legislation is its lack of precision, possibly inviting litigation every time a borrower falls behind on their payments. Yet the problems are real.

>Treasury Secretary Henry M. Paulson recently said there could be more than 1 million foreclosure proceedings started this year, with 620,000 of them dealing with sub-prime loans made to people with poor credit. Some analysts say a much larger number of mortgages is headed for trouble.

The White House objects to parts of the bill and the Senate does not have a bill in the works yet, delaying reforms on the mortgage market, which could be a year away. Hardly responsive to the problem. I wonder why the federal government can’t seem to get its act together on mortgage reform right now?

Holden Lewis of Bankrate breaks down H.R. 3915 nicely.

The “credit” card is played

>opponents said the bill would limit the availability of credit by hobbling lenders with red tape and filling them with a fear of running afoul of regulators or getting sued by borrowers.

The Mortgage Bankers Association objects to the bill because it places restrictions on its members, including selling mortgage products with interest rates above the what the borrower qualifies for. Another restriction they object to is the introduction of licensing to the profession.

While I agree with the intention of licensing, it is only there to complement existing restrictions and will not solve the problem by itself. The MBA can not self-police (look what happened). By only implementing licensing and no other regulator reforms, will only make the problem worse.

After appraisal licensing was introduced in 1991, the quality of appraisals fell considerably over the next decade. The rise of wholesale lending (mortgage brokers) as an origination source and appraisal licensing was a powerful cocktail for bad mortgages.

Why? Because an appraisal license freed the lender from some liability. Hey, I hired them because they were licensed by the state. There was less responsibility or focus on the competence of the appraiser being hired. A similar thing will happen with mortgage brokers if this is the only action taken.

There needs to be greater oversight introduced and the lenders need to be held more responsible (financial incentives are the only way to make this work) for the quality of mortgages they sell to investors, to force lenders to take a hard look at the mortgage brokers they do business with. Until now, its been lip service.

This is a systemic problem that mushroomed to disaster this summer. It will likely take as long to fix the problem as it took for the problem to develop, perhaps into the next “up” cycle.

On second thought, lets ram this legislation through right now.

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