Not long after foreclosures started to take off in 2007 and the mortgage market’s collapse began to cripple the economy, one lesson seemed obvious: The predatory lending practices that led to the crisis had to be reined in.
But despite massive government bailouts of banks and lenders due to losses from toxic mortgages, that reform still hasn’t happened. As the Obama administration urges lawmakers to quickly enact sweeping health care legislation this summer, the momentum to halt abusive lending practices and overhaul mortgage lending, by contrast, has stalled. A mortgage reform bill that passed the House in May was so complicated and contradictory it wound up angering some of the same consumer advocates who have been battling predatory lending. And – flaws and all – the measure isn’t likely to be taken up in the Senate anytime soon. Senate Banking Committee Chairman Christopher Dodd (D-Conn.) told reporters recently that mortgage reform will have to wait: “We’ve got a lot on our plate. We’ve got other things to do.” Dodd added that “There isn’t a lot of predatory lending going on right now… I’m not minimizing what happened before, and I don’t want to see a repetition of it, but there’s not subprime lending going on today.”
To many housing activists, the lack of action on the predatory lending bill is the final insult of a failed campaign to rapidly reform mortgage lending – something that once seemed like a slam dunk. First, a mortgage cramdown measure that would have forced lenders to write down loan amounts for borrowers in bankruptcy failed, after 12 Senate Democrats joined Republicans in refusing to support it. Then came dashed hopes for a more comprehensive predatory lending bill, and for quick action on it. To some, the window to tackle mortgage reform is open right now, and the time to act is before the housing market recovers and lending picks up again. The failure so far to do so, they worry, means little is being learned in Congress from the most severe financial crisis since the Great Depression – and even less progress is being made to ensure it doesn’t happen again.
“If there was anything that seemed like a sure bet, it was reforming mortgage lending,” said Alan White, a Valparaiso University law professor who studies subprime lending and foreclosures. “But the momentum seems to be fizzling. It’s certainly possible the subprime market could come back in some form someday, and I am surprised there hasn’t been more movement for real mortgage reform. The Blue Dog Democrats are being strong advocates for for the banking industry, and that makes it difficult for the more consumer-minded Democrats to get some kind of regulation passed.”
It gets even more complicated. Housing advocates aren’t eager to launch a high-profile campaign against Dodd over his relegation of the predatory lending bill to the back burner, given that Dodd is in the midst of a tough re-election battle. Should he lose, the next in line to head the Senate Banking committee would be Sen. Tim Johnson (S.D.), the only Senate Democrat to vote against Dodd’s credit card reform bill.
Beyond that, the House bill seems to have split the housing advocacy community, with some supporting it despite its drawbacks, and others strongly opposing it. The controversy is surprising, considering the measure was co-sponsored by Rep. Barney Frank (D-Mass.) chairman of the House Financial Services Committee, who has a history of consumer advocacy. As has been pointed out, Frank is trying to promote lending reforms without totally alienating the financial industry.
But it’s the housing advocates who are angry this time. Nine consumer, housing and civil rights groups, including the National Consumer Law Center and the National Association of Consumer Advocates, criticized Frank’s bill, saying it undermines existing state consumer protection laws. The NCLC said the bill would “do more harm than good” by pre-empting the state anti-predatory measures and by limiting the ability to sue Wall Street investment firms that buy up risky mortgages.
“The bill is complex, convoluted, and simply will not accomplish its main goal – to fundamentally change the way mortgages are made in this country,” the NCLC said in a statement.
The bill still won praise from some other consumer groups for prohibiting lenders from steering borrowers into higher cost loans and for requiring lenders to verify that borrowers have the ability to repay their mortgages, a long-sought goal of many housing advocates. And it bans pre-payment penalties, another fixture of subprime lending. But the bill doesn’t apply strong penalties for violating the law, and it includes the limits on legal challenges. The measure seems to have something in it for both mortgage lenders and consumer advocates, which only served to make everyone unhappy, Valparaiso’s White said.
Explained one advocate, who declined to go on the record in order to speak freely: “It’s the most complicated, arcane, ridiculous, confusing piece of crap any of us has ever seen.”
Other mortgage reforms also are running into complications. The National Association of Mortgage Brokers, for example, plans to restart a legal challenge to a new government approved code of conduct for appraisals, which is aimed at keeping lenders and brokers from pressuring appraisers to inflate home values. The new regulation stems from a mortgage fraud lawsuit by New York Attorney General Andrew Cuomo. It went into effect May 1 and requires mortgage giants Fannie Mae and Freddie Mac to only buy loans appraised under the new standard.
The NAMB and other industry groups, however, contend the regulation isn’t needed and only adds to the cost of buying a home. The NAMB plans to file another legal challenge soon to overturn the rule, after withdrawing an earlier attempt, said NAMB President Marc Savitt.
His group also continues opposing any changes in the way brokers get paid for making loans – something once considered an obvious target for reform.
An industry practice known as the yield spread premium, a form of sales commissions for mortgage brokers, has long been controversial, with consumer advocates contending some brokers misuse it to con borrowers into higher-rate mortgages. Frank’s bill appears to outlaw the yield spread premium – but no one’s entirely sure. “There are four different interpretations of the language right now,” Savitt said. Regardless, he said, “the yield spread premium and mortgage brokers are being used as scapegoats right now. Mortgage brokers don’t develop loan programs and don’t underwrite and approve loans, so how could this all be our fault?”
The problem for mortgage reform, said Margot Saunders, an attorney with the National Consumer Law Center, is that with mortgage brokers and mortgage originators in every congressional District, Congress has plenty of financial incentive to listen to arguments like that from the lending industry – and already does so. As the New York Times noted in an editorial on passage of the House anti-predatory lending measure: “The Senate needs to improve on the legislation and ensure that stronger reforms quickly become law. To do that, Senators will finally have to stand up to the mortgage industry and its all-too-well-paid lobbyists.”
Saunders and others say they’re trying to remain hopeful the Senate will take up mortgage reform again in the fall – but they’re not counting on it. “Congress,” said Saunders, “just acts like homeowners don’t matter.”
None of the current proposals, for example, even addresses the possibility of linking compensation to a loan’s performance, which would cut out incentives for brokers and lenders to make high-rate mortgages that borrowers can’t repay, Saunders said.
But some see some positive signs on reform. Both the Federal Reserve and the Federal Trade Commission are working on new rules for mortgages and other types of lending, which are expected to require greater disclosures of terms and rates. The Obama administration is backing a proposal to create a Financial Products Safety Commission, which would regulate mortgages, credit cards, and other kinds of lending by requiring more consumer protections.
And Congress may be slow to act on mortgage reform not because of lending industry opposition, but because “it’s incredibly complicated” to do so, and “Congress is running out of time” with so many other issues on its plate, said Bert Ely, a banking industry analyst.
Whatever the reason, Congress’ plate is full – and mortgage reform isn’t on it, at least in the near future. In the meantime, 5.4 million mortgages are delinquent or in some stage of foreclosure, and home prices continue to fall.
Mary Kane is an economy reporter for the Washington Independent.
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