Learning from the crisis caused by large numbers of real estate foreclosure properties for sale, the U.S. House Financial Services Committee passed a bill that would stamp down lending practices that could lead to another wave of foreclosure properties.
The bill would prohibit mortgage lenders and investors from transferring 100 percent of mortgage risk to buyers of repackaged home loan securities. The panel said the bill would force lenders to screen more thoroughly their borrowers since they hold some part of the risk. They would lose money if the mortgages later turn into foreclosure properties.
Democratic Representative Barney Frank, chairman of the committee, said 100 percent securitization leads to liberal lending practices and large number of foreclosure properties because lenders do not put effort in ensuring they will be paid back.
The bill, passed by a vote of 49-21, would also put limits on commissions for loan brokers and change some mortgage lending standards. Legislators said the bill would stop lending practices that led to staggering losses on mortgage securities and to the continued rise in foreclosure properties across the nation.
Frank stated the legislation would make the mortgage market function better and make it more vigorous.
Some Republicans opposed the bill, arguing it puts too many restrictions on the mortgage lending industry. Representative Randy Neugenbauer of Texas said the bill assumes that all mortgage loans originated in the past several years turned into foreclosure properties. He said the bill did not consider the fact that many borrowers took loans they should have not taken in the first place.
The Mortgage Bankers Association and other financial industry lobbies opposed the legislation, saying it would tighten credit and would increase lawsuits against mortgage lenders. Specifically, the mortgage lending industry opposes the provision that holds lenders responsible for repackaged mortgage securities from loans that did not meet lending standards.
The bill, introduced in March by Democratic Representatives Brad Miller and Melvin Watt, would also prohibit lenders from hedging on nontraditional mortgage loans such as adjustable-rate loans or loans that require little income documentation.
Miller reiterated that the flood of foreclosure properties since 2007 would have not happened if mortgage lending practices were regulated.
Lastly, the bill would encourage the application of conventional fixed-rate 30-year loans and would require lenders to make sure borrowers are able to repay their loans to prevent the emergence of another wave of foreclosure properties.
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