Senators Legislate Mortgage Lending

The Mortgage Bankers Association commended the U.S. Senate for today’s passage of the Terrorism Risk Insurance Program Reauthorization Act of 2007, noting extension of the program is crucial to bolster the capital market’s confidence in the commercial and residential real estate finance industries.

“Extension of the Terrorism Risk Insurance Program is crucial to maintaining the smooth operation of the commercial real estate finance market,” MBA said in an announcement. “This is a huge step toward assuring that terrorism risk insurance will remain available and affordable over an extended period of time.

“We look forward to working with members of the House and Senate to address the differences between the legislation passed by each body and get a bill to the president that he can sign before the current law expires the end of the year.”

A total of $200 million in funds for foreclosure prevention counseling was approved by the House of Representatives as part of its final passage of the Transportation, Housing and Urban Development Appropriations conference report, according to an announcement Thursday by the three U.S. senators who requested the funds last spring, Charles E. Schumer, D-N.Y., Sherrod Brown, D-Ohio, and Bob Casey, D-Pa.

It is estimated the House-approved funds, which doubled from the previously authorized $100 million and will all be used by nonprofit counseling programs, will help 200,000 borrowers in unaffordable subprime loans keep their homes. However, the conference report must gain final approval by the Senate for the funds to become effective.

“This investment will pay for itself many times over,” Schumer said in the announcement, which noted two million borrowers face foreclosure over the next two years as subprime loans reset to higher rates and that a typical foreclosure costs up to $227,000. “Empowering more housing groups to help borrowers negotiate for safe and sustainable loan modifications and refinancings will not only save hundreds of thousands of homes, but it will help shore up the struggling housing market and restore confidence in the mortgage market.“

Schumer also announced Thursday he introduced a subprime mortgage bill to protect New York borrowers from predatory lending practices. The bill mandates brokers and lenders to give mortgage applicants a one-page disclosure at least seven days before closing. The easy to read form lets borrowers know the initial interest rate and monthly payment, date of scheduled rate reset, estimated fully-indexed interest rate and monthly payment after reset, closing fees, and any prepayment penalties, balloon payments, negative amortization, or subordinate or “piggyback” loans.

The bill follows a report that revealed 50,000 out of 160,000 subprime borrowers with loans totaling over $26 billion in upstate New York would likely have qualified for a prime loan. Schumer placed blame on brokers and lenders who received financial perks to steer potential prime borrowers into expensive subprime mortgages.

Thursday also held the Senate’s unsuccessful attempt to pass the FHA Modernization Act of 2007.

Schumer urged the Senate to expedite passage of the FHA bill, which reportedly includes a loan limit increase, allows risk-based pricing, lowers the down payment requirements to 1.5 percent from the current 3 percent, and includes provisions that enhance consumer and fraud protection. The improvements would give FHA greater flexibility to provide refinancing alternatives for subprime borrowers before their loans reset to unaffordable rates.

Senate Majority Leader Harry Reid of Nevada also urged the Senate to pass the FHA bill.

“I really don’t know what objections there could be to this,” Reid said in a video following his appearance on the Senate floor.

U.S. Senator Tom Coburn, R-Okla., however, issued a statement in opposition of the Senate’s attempt to rush passage of mortgage reform without the opportunity for debate or amendment.

Christopher J. Dodd, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, announced he was disappointed by the decision but said he will continue to work for its passage.

“This is far too important, and has too much bipartisan support, to be held up by a small handful,” Dodd said in the announcement. “The fact is this bill can help generate quality mortgage credit for working families and help prevent them from being swallowed up in a financial sink-hole that threatens homeowners nationwide. This measure can help provide critically important affordable credit to homeowners struggling to buy a home or help homeowners seeking a way out of abusive loans and foreclosure.“

Schumer had additionally requested that the Senate expedite the PROMISE Act in order to more timely assist borrowers in risky, unaffordable subprime mortgages. The bill would temporarily raise, for six months, the government-sponsored enterprises’s portfolio caps by 10 percent, allowing for 85 percent of the increase to be dedicated to assisting in the refinancing of subprime ARM mortgages at risk of foreclosure.

“The frustrating thing is the administration is opposed to this legislation,” Schumer said, according to a statement of his remarks before the Senate. “They just don’t like Fannie and Freddie and they say let the markets take care of this in their own way.”

“We’ve all heard the GSEs are the only game in town for secondary market trading due to profound distrust of credit quality and rampant uncertainty about the rating agencies,” he added. “We have to use the liquidity they provide to target those subprime borrowers in a need of saving their home.”