Congress and Administration Advocate Changes in Mortgage Rules

The Obama administration is giving financial institutions more incentives to modify second mortgages, while Congress is trying to make those institutions more accountable for home loans that they make.Last week, the administration unveiled regulations that would pay lenders $500 for each second mortgage they modify and additional annual payments of $250 for three years if the borrower remains current.The regulations also provide for an automatic adjustment of the payments on second mortgages for consumers who have modified their first mortgage.“Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system overall. Every step we take forward is done with that imperative in mind,” Treasury Secretary Tim Geithner said in a statement when the program was unveiled.According to the Obama administration, 50% of at-risk homowners have second mortgages, which were popular during the housing boom either to fund home improvements or to buy houses with a minimal down payment.The administration’s original plan, announced in February, only applied to first mortgages.Under the new plan, lenders that agreed to participate would lower the interest rate to 1% on second mortgages on which the borrower is paying principal and interest and 2% on those when the borrower is only repaying interest.The administration also changed the rules to the Hope for Homeowners program, unveiled by the Bush administration last year. Lenders will receive $2,500 to refinance a mortgage in this program and $250 per year for three years if the borrower remains current in his or her repayments.Neither CUNA nor NAFCU had commented on the program as of press time.Last Wednesday, the House Financial Services Committee approved a bill designed to make lenders more responsible for home loans that they make.Under the measure, lenders would be banned from making loans to those whom they don’t think have a reasonable chance of being able to repay. It also encourages lenders to make 30-year fixed-rate mortgages Lenders would be required to keep a 5% stake in nontraditional mortgages until those are paid off, which supporters of the measure say will encourage more cautious lending decisions.CUNA, NAFCU and NASCUS all expressed concerns about the measure.CUNA President/CEO Dan Mica wrote the panel that the 5% requirement would make “refinancing more complicated” and would have the effect of “limiting the ability of mortgage lenders to make more mortgages, since they would be retaining 5% of their originations on the books.”Mica also said that many of the goals of the bill would be accomplished by regulations that have already taken effect or are scheduled to take effect later this year.NAFCU President/CEO Fred Becker said the legislation would “restrict borrowing practices and tighten lending” and “make it more difficult for credit unions to make loans for people on the margins.”He also said that the provisions that encourage 30-year fixed loans were “drafted too narrowly” and should be broadened to encompass other types of loans.NASCUS President/CEO Mary Martha Fortney said the measure preempts the ability of states to regulate certain types of predatory lending.“If the federal standard is a maximum ceiling, it will act to suppress state law and a state’s authority to provide enhanced consumer protection for citizens,” she wrote.States are often in the best spot to identify predatory lending and parts of the bill would tie the hands of state legislatures and regulators from doing their job, she added.A similar measure passed the House in 2007, but the Senate took no action on it.–[email protected]