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U.S. lawmakers addressing mortgage lending reforms

[Jun 21, 2010.]


U.S. lawmakers are working on reforming mortgage lending procedures identified as contributing to the ongoing financial crisis. Legislators are targeting lax mortgage underwriting, questionable home appraisals, and are also considering the impact of long-term unemployment on homeowners. While "big government" is not a favorite concept among fiscal conservatives, lawmakers are compelled to manage circumstances contributing to depressed housing markets and escalating mortgage foreclosures.

Mortgage lenders to prove borrowers can afford payments: don't they do that now?

Proposed elements in the mortgage lending reform legislation require mortgage lenders to tighten multiple aspects of lending requirements:

  • Documenting proof of borrowers' ability to repay their mortgage loans: Without specifics, this proposal is puzzling, as standard FHA and conventional mortgage underwriting processes include verification of borrower income, employment, assets, and source of down payment.

  • Documenting that refinancing is in borrowers' "best interest": This is likely to encounter resistance from lenders and consumers, as it should be up to homeowners to determine their own "best interests" if they are otherwise able to qualify for mortgage refinancing.

A lingering question when approving a mortgage loan is employment. Layoffs and pay cuts are increasingly common, and long-term unemployment is destroying the ability of affected homeowners to continue making their mortgage payments.

Mortgage loan appraisals: a trouble spot

The legislation would also require a new set of standards governing residential appraisals obtained for the purpose of approving mortgage loans. Mortgage lenders fear that this could cause more "lowball" appraisals, which could cause loans and home sales to fall through. Artificially high appraisals also cause problems when housing markets adjust; how or if appraisals will ultimately be addressed in the legislation is unclear.

Saving home loans: helping the unemployed

Although the House approved a measure designating $3 billion in TARP funds for "bridge loans" intended to assist unemployed homeowners, the Senate never voted on the bill. Community advocates assert that some form of relief for unemployed homeowners is essential, as unemployment is now the primary cause of mortgage loan foreclosure.

Mortgage lenders may face more lawsuits

Mortgage lenders have indicated concerns about increased lawsuits from consumers and others if stricter regulations interfere with the loan approval process. Although it's impossible to please everyone, any action toward eliminating irresponsible lending practices and mortgage foreclosures is a step in the right direction.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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