Wall Street Reform to Tackle Risky Mortgages

Wednesday, 23 Jun 2010 01:24 PM

 

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink

They were at the root of the financial crisis: Risky home loans made to borrowers with poor credit. And "liar loans" that let people with little incomes get big mortgages they couldn't repay.

Such dicey practices helped cause the housing bubble and bust that pushed the economy into recession. The overhaul Congress is negotiating is designed to prevent a recurrence. Lawmakers still must settle the differences between the House and Senate versions. But here's a look at the likely results:

Q. How would the bill improve mortgage lending?

A. Most of all, lenders could no longer make a loan without verifying that the borrower can repay it. They would need to review the borrower's income, credit history and employment status. That might sound obvious. But lenders weren't required to do so in the past.

Q: What would change for banks?

A: Besides tightening loan requirements, they would have to take on more of the risks involving the kinds of complex mortgage investments that soured during the crisis. Lenders that sell mortgages would have to keep at least 5 percent of the packaged loans on their books. With such "skin in the game," the thinking goes, lenders would have an incentive to make safe loans. The mortgage industry resisted this change. It argues that many lenders, especially small ones, won't be able to compete if they have to keep some packaged loans on their books. So the Senate drafted an exception: Loans that meet strict standards can avoid this requirement. But House Democrats want that exception removed.

Q: What would change for ordinary people?

A: Homeowners would likely have to show pay stubs or other evidence they can make payments. Lenders already have made it harder for consumers to qualify for loans over the past two years. Higher credit scores, down payments and full proof of income have been imposed. But the new bill goes further.

Lenders would have to disclose the maximum amount that borrowers could pay on adjustable-rate mortgages. And borrowers wouldn't be as vulnerable to pressure to take on high-priced loans. The legislation would bar mortgage lenders from receiving incentives to push people into such loans. That's a response to long-standing allegations that mortgage brokers received extra payments for steering borrowers into higher-priced loans.

In addition, a consumer watchdog would help shield people from unfair lending policies.

Q: Where does the bill fall short?

A: It does nothing to address the problems of Fannie Mae and Freddie Mac. Those two government-controlled mortgage giants have cost taxpayers $145 billion so far. And they show no signs of becoming self-sufficient.

Fannie and Freddie buy mortgages from lenders and package them into bonds that are sold to investors. As the housing bubble burst, Fannie and Freddie failed to raise enough money to stay afloat, and the government effectively nationalized them.

The Obama administration wants to wait until next year to determine the future of Fannie and Freddie.

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web

Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Retype Email:
Country
Zip Code:
Privacy: We never share your email.
 

You May Also Like
Around the Web

Most Commented

Newsmax, Moneynews, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, NewsmaxWorld, NewsmaxHealth, are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved