House Eyes Minneapolis Duplex Mortgage Reform

One hand handcuffed to a piggy bankThe Washington Post reported Saturday that Congress is introducing legislation to help reform the mortgage market. The thinking is had stricter standards been in place, neither the housing boom nor its demise would have been as big.

Authored by Reps. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, Melvin Watt (D- N.C>) and Brad Miller (D- N.C.), the Mortgage Reform and Anti-Predatory Lending Act of 2009 9 (H.R. 1728) is expected to reach the Senate for consideration by May.

If passed, the bill would:

  • Prohibit loan officers from being paid any fees that are tied to the type or interest rate of the mortgage. During the boom, mortgage brokers were often paid more if they originated exotic loans such as interest-only, payment option and no-documentation loans with small down payments.
  • Create mandatory minimum standards for all loans.  Regulations would encourage lenders to originate loans that are more traditional: at 30-year fixed rates, with full documentation. Homeowners who refinance would have to be able to pass a “net tangible benefit” test, proving the loan they are refinancing into is better than the one they’re in.
  • Allow people who get mortgages not in keeping with the above to immediately cancel their entire loan contract; requiring the lender to refund all payments and fees.
  • Six-month notice before the reset of hybrid adjustable rate mortgages. A hybrid mortgage is one with a fixed rate for a defined period of time that resets after the expiration of the intial term.

While in theory, many of these ideas seem solid, it’s important to remember possible pitfalls.

The “stated income” or no-documentation loans so many are blaming for the housing crisis originated as a means for people who are self-employed to get financing. Most entrepreneurs legally take many tax deductions, which creates the appearance on their tax returns that they make very little, which may or may not be the case.

In today’s lending environment, many self-employed people are finding it difficult to obtain financing.

The bill also fails to clarify whether it will prohibit refinancing for the purposes of debt consolidation. Should a Minneapolis duplex owner fall onto some sort of financial hardship, will he be able to refinance his residence to solve the issue? Even if prevailing interest rates are higher than those on his existing mortgage?

As always, write your Congressional representative and make your voice heard.