The U.S. House and Senate will start on refining mortgage legislation Tuesday. The legislation would like to enforce the biggest overhaul to mortgage lending rules in decades. The mortgage legislation is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working really hard to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.

Article Resource: Lobbyists fight to weaken new mortgage rules in financial reform

Preventing another financial crisis with mortgage rules

Proposed changes to mortgage lending rules include a whole lot of new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that most of these rules will affect how expensive mortgages will end up being and what types of mortgages can be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine needs many of the lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles include the mortgage-backed securities that imploded and caused the financial disaster.

Will mortgage lenders behave?

With mortgage legislation that demands lenders to hold a stake, the idea is that they will act a lot more professionally with their underwriting. When lenders sold their risk along with their loans, they were careless and then handed out many loans which were destined for default. It was reported by the Wall Street Journal that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and do not include interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees somewhere near 3 percent of the loan.

Mortgages that are a lot more costly with new rules?

Banks say new mortgage lending rules about risk retention will make mortgages a lot more costly for consumers because banks could be required to hold more capital, a challenge for smaller lenders. But Housing Watch said the consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules are likely to make more paperwork for borrowers, however they already push a lot of paper trying to get loans in today’s constricted credit markets. A lot more diligence from banks about verifying a borrower’s income to prevent default should be really good for everyone.

Finding a way to protect borrowers from predators

New mortgage lending rules will contain compensation guidelines that prevent lenders from making a lot more money by making riskier loans. This provision of the financial reform bill would make certain there are lender-paid commissions based on the rate or type of loan. It was reported by the Wall Street Journal that brokers say the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Director of housing policy for the Consumer Federation of America, Barry Zigas, told the Journal that the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”

Saving mortgage lenders from themselves

Other new mortgage rules that are being fought consist of limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also do not like the rule that calls for them to prove that it is in the borrower’s best interest to finance a loan, rather than just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders don’t want borrowers to be able to sue them if they find some way violate the new mortgage rules. Industry lobbyists say this would make purchasing mortgages too risky for investors.

Discover a lot more information on this topic

Housing Watch

housingwatch.com/2010/06/21/new-mortgage-rules-may-hurt-borrowers/

Wall Street Journal

online.wsj.com/article/SB10001424052748704050804575318753964100106.html?mod=googlenews_wsj