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Congress Is Primed to Address Crisis Over Mortgages

The subprime mortgage crisis that threatens to send 2 million mortgages worth an estimated $500 billion into default has some lawmakers looking to the Federal Housing Administration and government-sponsored entities Fannie Mae and Freddie Mac as possible saviors for the shaky housing market.

Lawmakers are eyeing legislation to allow the housing giants and federal agency to come to the rescue of homeowners facing default and foreclosure on adjustable rate mortgage loans made by subprime lenders.

The subprime crisis stems from a surge of adjustable mortgages often approved without proper assessment and documentation. Those loans — typically extended to lower-income homebuyers, many of whom had tarnished credit histories — ran into trouble when the housing bubble burst. Early this year, many subprime lenders closed their doors, declaring bankruptcy and forcing the Federal Reserve to cut rates and inject billions of dollars into the markets to avoid a broader housing collapse.

House Financial Services Chairman Barney Frank (D-Mass.) has been at the forefront in calling for major modifications of the FHA, the agency charged with providing mortgage insurance for agency-approved loans.

Frank and Rep. Maxine Waters (D-Calif.) jointly sponsored the Expanding American Homeownership Act (H.R. 1852), arguing that it would give the FHA greater flexibility to reach lower-income borrowers who have been hurt by the subprime market meltdown.

Their bill, which the full House approved last week, would add provisions that increase loan limits in higher-income areas, where lawmakers contend that the FHA has been driven from the market, forcing borrowers to seek higher-cost financing. It also would permit the FHA to offer no-down-payment mortgages to certain consumers and link mortgage premiums to the risk posed by borrowers.

According to Frank, the Bush administration concedes that loan levels need to be raised, although not as far as Frank wants. The chairman wants to raise the limits up to $500,000, as opposed to the $417,000 limit endorsed by the administration and included in Senate legislation. Frank said those differences likely would have to be settled in conference negotiations over the bill, with the administration also having input. Senate Banking, Housing and Urban Affairs Chairman Chris Dodd (D-Conn.) last week pushed through committee the Senate version of the measure with lower loan levels.

Frank also wants credit unions to get involved in helping homeowners restructure their subprime loans into more traditional loan products.

“If only other institutions were regulated like credit unions, there wouldn’t have been a subprime crisis,” Frank said.

Sen. Charles Schumer (D-N.Y.), a Finance Committee member, wants Freddie Mac and Fannie Mae to help borrowers refinance subprime loans. His latest legislative proposal, the Protecting Access to Safe Mortgages Act (S. 2036), would raise portfolio limits on government-sponsored enterprises by 10 percent, freeing up nearly $145 billion for Fannie and Freddie to purchase mortgages in the subprime sector.

“Together with nonprofit lenders and loan services, Fannie and Freddie are the missing ingredient to stem the rising tide of foreclosures that is about to hit the economy,” Schumer said in a statement. “The bottom line is that we should be deploying Fannie and Freddie to do the job they were designed to do.”

The regulation of mortgage loan originators also is at play. House Financial Services Republicans Spencer Bachus (Ala.), the ranking member of the committee, and Rep. Deborah Pryce (Ohio) are co-sponsoring the Fair Mortgage Practices Act (H.R. 3012), which would set licensing standards and create a national database for mortgage brokers and others who sell home loans. It requires mortgage providers to weigh a borrower’s ability to repay loans and would restrict penalties against homeowners who refinance high-cost loans.

Schumer also is sponsoring a bill (S. 1299) that would regulate mortgage brokers and originators under the Truth in Lending Act, outline standards for brokers and originators to assess a borrower’s ability to repay a mortgage and hold lenders accountable for brokers and appraisers.

Fallout from the subprime market also has increased attention on consumer credit card practices that are deemed abusive by consumer advocates. Hesitant to cut off a source of consumer credit but eager for action to revamp credit card industry policies, Rep. Carolyn Maloney (D-N.Y.), who chairs the Financial Services Subcommittee on Financial Institutions and Consumer Credit, is expected to offer legislation to heighten regulation of the industry this month. Quick action is expected, since Frank has indicated that he would like to move a bill in October.

High on Maloney’s list of “gold standard” principles are elimination of universal default, a practice by which a card issuer raises the interest rate on a card based on a change in the cardholder’s credit score or a late payment with another lender. Other likely provisions will propose the elimination of “any time, any reason” repricing and double-cycle billing. The latter refers to calculating a cardholder’s average daily balance over two billing periods rather than one month.

Meanwhile, President Bush in late August unveiled his plan to help curb the effects of the subprime mortgage crisis, including modifications to FHA offerings, temporary suspension of tax rules that require that mortgage forgiveness be treated as taxable income and expansion of an FHA program to allow subprime mortgage holders who are 90 days late to qualify to refinance their loans with more traditional, lower-rate products.

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