As 2007 came to a close, Congress had done a lot of talking about cracking down on unfair and deceptive mortgage lending practices, but didn’t deliver on any major legislation.
Although there’s some consensus that tighter regulations or new laws governing lenders are needed, some lawmakers have been reluctant to impose restrictions that might worsen the credit crunch and the housing downturn.
In the meantime, the Federal Reserve has proposed strengthening its implementation of the Truth in Lending Act, through new regulations that would require subprime lenders to verify a borrower’s ability to repay a loan after a payment reset; document income and assets; and establish escrow accounts for taxes and insurance for a minimum of one year.
The Fed, which has some authority to draft new regulations for mortgage lenders without congressional approval, also proposes that lenders be required to enter into written agreements before collecting yield spread premiums on any loans, and wants new regulations prohibiting the coercion of appraisers to inflate property valuations.
Although new restrictions on lenders might make it harder — or more expensive — for borrowers to obtain loans, some say Congress could also ease the credit crunch by giving the Federal Housing Administration, Fannie Mae and Freddie Mac more leeway to guarantee and purchase loans.
While there was widespread agreement among lawmakers and the Bush administration that it’s time to modernize FHA loan guarantee programs and overhaul oversight of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the devil was once again in the details.
The House and Senate both passed FHA modernization bills, but couldn’t agree on what the upper limit should be for FHA-backed loans in high-cost areas — or the minimum down payment. The House and Senate also took opposing stances on a plan to allow FHA to introduce risk-based pricing, charging higher premiums to borrowers who might not otherwise qualify. Those differences will have to be worked out in a House-Senate committee before a bill can be sent to President Bush to sign.
When it came to GSE reform — legislation that would create a new, independent regulator overseeing Fannie and Freddie — the House passed a bill in May, but the Senate didn’t follow suit. As was the case in 2006, there were disagreements over caps limiting growth in Fannie’s and Freddie’s loan portfolios. House lawmakers further complicated the issue by attempting to create a $500-million-a-year affordable-housing fund sponsored by Fannie and Freddie.
Congress did succeed in passing legislation that would provide tax breaks for some homeowners with private mortgage insurance, and exempt debt forgiven in a foreclosure, short sale or workout from being classified as taxable income.
Here’s a roundup of legislation debated by Congress in 2007, which could provide the framework for lawmakers in the New Year:
WHAT: HR 1427, the Federal Housing Finance Reform Act of 2007.
WHY: Federal regulators imposed caps on the loan portfolios of mortgage repurchasers Fannie Mae and Freddie Mac after accounting and management scandals forced both companies to restate several years of earnings. HR 1427 would strengthen oversight of the government-sponsored enterprises (GSEs) by creating an independent agency with powers similar to those of a bank regulator. While some Democrats want to increase the $417,000 conforming loan limit — and raise the $1.5 trillion cap on Fannie’s and Freddie’s loan portfolios to allow them to buy up more loans — the Bush administration has said it wants to see a stronger regulator in place first.
STATUS: Approved by the House May 22 in a 313-104 vote. Referred to the Senate Committee on Banking, Housing and Urban Affairs.
PROSPECTS: Iffy. The issue of the caps on Fannie’s and Freddie’s loan portfolios stalled Senate passage of a GSE reform bill in 2006. In 2007, compromise language worked out by Rep. Barney Frank, D-Mass., and the Treasury Department, would have given Fannie and Freddie’s new regulator, the Federal Housing Finance Agency, the ability to limit their loan portfolios — but only if they were determined to pose a systemic risk to banking and financial systems. The bill approved by the House backed away from the compromise by giving the FHFA less leeway to make such a determination — potentially allowing for more growth in Fannie’s and Freddie’s loan portfolios. The Bush administration is also opposed to a provision of the bill that would require Fannie and Freddie to contribute about $500 million a year to an affordable-housing fund.
WHY: Congress and the Bush administration generally agree on the need to modify loan guarantee programs offered by the Federal Housing Administration, which lost market share to subprime lenders during the housing boom in part because of tight limits on the maximum dollar amounts of loans it could back. HR 1852 would increase the maximum amount for loans to be eligible for FHA backing in high-cost areas to up to 175 percent of the $417,000 conforming loan limit — $729,750 — or 125 percent of an area’s median home price, whichever is less. The House bill would also allow the expanded use of risk-based pricing to serve borrowers with lower credit scores, and do away with 3 percent minimum down-payment requirements.
A Senate version of the bill, SB 2338, would increase FHA loan limits in high-cost areas by a smaller amount — raising them from $362,000 to $417,000. The Senate bill would also maintain a 1.5 percent minimum down-payment requirement on FHA loans, and place a 12-month moratorium on the implementation of a pilot program to test risk-based pricing.
STATUS: The House approved its FHA modernization bill Sept. 18 in a 348-72 vote. A Senate version of the bill, SB 2338, was approved Dec. 14 in a 93-1 vote.
PROSPECTS: Good. The Bush administration has made FHA loan guarantees a centerpiece of its foreclosure prevention efforts, creating the new FHASecure program to help qualifying borrowers already in default refinance into more affordable loans. The administration supports the more modest increases in FHA loan limits set forth in the Senate version of the bill. While the House bill would allow risk-based pricing, the administration is opposed to limitations it would impose on premiums.
WHAT: HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007.
WHY: Under current law, the IRS considers many forms of forgiven debt to be taxable income. There’s general agreement that Uncle Sam shouldn’t penalize troubled homeowners who are able to convince their lenders to forgive part of their debt as part of a foreclosure, short sale or loan workout. As introduced, HR 3648 would have permanently changed the tax code to give homeowners a tax break if their lender forgives part of their debt. The bill would also extend the current deduction for private mortgage insurance to 2014, helping low- and moderate-income home buyers avoid costly — and hard-to-find — piggyback loans. A permanent tax break for borrowers on forgiven debt would have cost an estimated $1.38 billion over the next 10 years, and extending the deduction for private mortgage insurance would have eliminate about $570 million in tax revenue over the same period. The bill would have made up for the lost revenue by tightening the rules for claiming a deduction on the sale of a second home.
STATUS: HR 3648 was passed by the House Oct. 4 in a 386-27 vote. The bill was amended by the Senate, which limited both tax exemptions — for debt forgiveness and private mortgage insurance — to three years, leaving intact existing provisions for claiming a deduction on gains from the sale of a second home. The House agreed to the amendments in a Dec. 18 voice vote.
PROSPECTS: Excellent. The Bush administration objected to a permanent tax exemption for forgiven debt, and was opposed to tightening the rules that govern when a second home, vacation or rental property can be claimed as a primary residence for tax purposes. With the House’s acceptance of the Senate’s amendments on those issues, the president is expected to sign the bill into law.
Restrictions on lenders
WHY: Democrats have introduced these bills to combat predatory lending, and have attempted to craft them to address industry concerns that some provisions could worsen the credit crunch and reduce borrowers’ access to home loans. HR 3915 would create a national licensing system for loan originators and attempts to limit the payment of yield spread premiums or other incentives used to steer borrowers into higher cost loans. The bill would also require lenders to determine that borrowers have a reasonable ability to repay a loan, and create limited liability for companies that bundle mortgages for sale to Wall Street investors. SB 2452 would require loan servicers to attempt loss mitigation strategies before initiating foreclosure proceedings against borrowers, require lenders to follow existing federal guidelines for subprime and nontraditional mortgage loans, and lower the threshold for loans to fall under even stricter requirements for high-cost mortgages as defined by the Home Ownership Equity Protection Act, or HOEPA.
STATUS: HR 3915 approved Nov. 15 in a 291-127 vote. SB 2452 was introduced Dec. 12 and referred to the Committee on Banking, Housing and Urban Affairs
PROSPECTS: Iffy. Although HR 3915 enjoyed bipartisan support in the House, some of the bill’s provisions could face tougher sailing in the Senate. The Bush administration can use its veto power to force compromise on any provisions it objects to in either bill.
WHY: Supporters of these bills want to give federal bankruptcy judges the power to modify the terms of subprime mortgage loans, saying courts could stem foreclosures. HR 3609 would give judges the ability to convert an adjustable-rate loan into a fixed-rate mortgage, and reduce the amount owed to reflect the actual value of the principle residence of a borrower filing for Chapter 13 bankruptcy protection. Lending industry opponents say the bill would create incentives for borrowers not to repay their home loans and lead to more bankruptcy filings. Because the bill would undermine confidence in the ability of lenders to collect payments, interest rates on all mortgages might go up as much as 2 percent, critics including the Mortgage Bankers Association claim.
STATUS: HR 3609 was approved by the House Judiciary Committee Dec. 12 in a 17-15 vote. SB 2136 was the subject of a Dec. 5 hearing before the Senate Judiciary Committee, which took no action on the bill.
PROSPECTS: Slim. Although the bill that emerged from the House Judiciary Committee included compromise language restricting its application to subprime loans originated after Jan. 1, 2000, and exempting loans originated after its enactment, Ohio Rep. Steve Chabot was the lone Republican supporting the bill.
WHAT: HR 4178, the Emergency Mortgage Loan Modification Act of 2007.
WHY: This bill, authored by Rep. Mike Castle, R-Del., would protect loan servicers who engage in workouts with borrowers from lawsuits by investors in securities backed by the loans. The bill would provide a "safe harbor" allowing loan servicers to restructure subprime loans in default or where default is imminent.
STATUS: Introduced Nov. 14 and referred to House Committee on Financial Services.
PROSPECTS: Iffy. The bill was intended to encourage loan servicers — like those participating in the Bush administration’s HOPE NOW alliance — to engage in workouts without fear of lawsuits from investors. But Bush administration officials, including Comptroller of the Currency John Dugan and FDIC Chairwoman Sheila Bair — say the bill could undermine confidence in the secondary mortgage market and question whether it could withstand legal challenges.
WHAT: HR 2895, the National Affordable Housing Trust Fund Act of 2007.
WHY: Democrats including California Rep. Maxine Waters say the federal government has done little to build affordable housing in recent years. HR 2895 would siphon off $800 million to $1 billion annually from Fannie Mae, Freddie Mac and the Federal Housing Administration to build, rehabilitate or preserve 1.5 million units of rental housing over the next decade.
STATUS: Approved by the House Oct. 10 in a 264-148 vote, referred to the Committee on Banking, Housing and Urban Affairs.
PROSPECTS: Iffy. The Bush administration objects to tapping Fannie and Freddie for an affordable-housing fund, and HUD Assistant Secretary Brian Montgomery told members of the House Financial Services Committee this summer that diverting revenue from FHA programs would be like "robbing Peter to pay Paul." Democrats have included similar provisions in House versions of GSE reform and FHA modernization bills that may not be embraced by the Senate.